CFO Investment Analysis

Question 1

A project with conventional cash flows has a positive NPV when discounted at the firm's 10% cost of capital. What must be true of its IRR?

Accepted Answer

IRR is greater than 10%

Answer

For conventional cash flows, a positive NPV at a given rate means the IRR exceeds that rate.

Question 2

A project requires a $1,000,000 investment and its future cash flows have a present value of $1,200,000. What is its profitability index?

Accepted Answer

1.20

Answer

PI = PV of future cash flows ÷ initial investment = $1.2M ÷ $1.0M = 1.20.

Question 3

Two mutually exclusive projects rank differently under NPV and IRR. Which project should a value-maximizing CFO choose?

Accepted Answer

The project with the higher NPV

Answer

NPV measures the absolute dollar increase in shareholder wealth, so it governs when rankings conflict.

Question 4

What is the most significant weakness of the simple payback period method?

Accepted Answer

It ignores cash flows occurring after the payback point

Answer

Payback ignores all cash flows beyond the cutoff and also ignores the time value of money.

Question 5

What reinvestment rate assumption does the Modified Internal Rate of Return (MIRR) typically use?

Accepted Answer

The firm's cost of capital

Answer

MIRR assumes interim cash flows are reinvested at the cost of capital, which is more realistic than IRR's assumption.

CFO - Certified Chief Financial Officer Practice Test