Business Case Writing Financial Analysis in Business Cases 1 — Questions and Answers
Question 1: Which financial metric measures the time required to recover the initial investment from net cash inflows?
- Payback Period (Correct answer)
- Net Present Value
- Internal Rate of Return
- Return on Equity
Correct answer: Payback Period
The payback period calculates how long it takes for cumulative net cash inflows to equal the initial investment outlay.
Question 2: In a business case, NPV stands for:
- Net Profit Value
- Net Present Value (Correct answer)
- Nominal Project Value
- Net Performance Value
Correct answer: Net Present Value
NPV (Net Present Value) is the difference between the present value of cash inflows and outflows over a period of time.
Question 3: A business case with an IRR greater than the company's cost of capital should generally be:
- Rejected
- Accepted (Correct answer)
- Deferred indefinitely
- Reviewed by external auditors
Correct answer: Accepted
When IRR exceeds the cost of capital (hurdle rate), the project generates more return than its financing cost and should be accepted.
Question 4: Which cost type is excluded from a business case's incremental analysis because it has already been incurred?
- Variable costs
- Sunk costs (Correct answer)
- Opportunity costs
- Direct costs
Correct answer: Sunk costs
Sunk costs are past expenditures that cannot be recovered and should not influence future business case decisions.
Question 5: A sensitivity analysis in a business case is used to:
- Identify the project sponsor
- Test how NPV changes when key assumptions vary (Correct answer)
- Calculate employee bonuses
- Determine marketing spend
Correct answer: Test how NPV changes when key assumptions vary
Sensitivity analysis shows how sensitive the business case outcome is to changes in key variables like cost, revenue, or discount rate.
Question 6: Which discount rate is most commonly used in US corporate business cases to reflect the minimum acceptable return?
- Federal funds rate
- Weighted Average Cost of Capital (WACC) (Correct answer)
- Prime lending rate
- Treasury bill rate
Correct answer: Weighted Average Cost of Capital (WACC)
WACC reflects the blended cost of a company's debt and equity financing and is the standard hurdle rate for US corporate business cases.
Business Case Writing Financial Analysis in Business Cases 1
Which financial metric measures the time required to recover the initial investment from net cash inflows?