FIN 470: Exam I Review Study Guide
Solutions
Net Present Value (NPV) - Ans:-Represents the amount by which firm value changes with acceptance
of the project
Problems with NPV - Ans:-Managers and investors are accustomed to, and have a preference for,
measuring the expected return of an investm...
Net Present Value (NPV) - Ans:✔✔-Represents the amount by which firm value changes with acceptance
of the project
Problems with NPV - Ans:✔✔-Managers and investors are accustomed to, and have a preference for,
measuring the expected return of an investment in percentage terms
Internal Rate of Return (IRR) - Ans:✔✔-The rate of return that equates the present value of the project's
net cash flows with the project's net initial investment
Problems with IRR - Ans:✔✔-- Multiple IRRs are generally realized when the project has more than one
sign change in its periodic cash flows.
- WACC is a more appropriate for the reinvestment rate
- IRR and NPV may yield a different project ranking when evaluating alternative mutually exclusive
projects.
Modified Internal Rate of Return (MIRR) - Ans:✔✔-The rate of return that equates the present value of
the project's cash flows with the net investment
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