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Financial Planning Flashcards

7 cards from real CIA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

Read the first 7 Financial Planning flashcards as text

  1. Under the net present value method, a project should be accepted when:

    Answer: NPV is greater than zero

    A positive NPV means the project earns more than the required rate of return and adds value.

  2. The internal rate of return is the discount rate at which:

    Answer: Net present value equals zero

    IRR is the rate that makes the present value of inflows equal the initial investment.

  3. Which is a key weakness of the simple payback method?

    Answer: It ignores the time value of money and cash flows after payback

    Simple payback ignores discounting and any cash flows received after the investment is recovered.

  4. A project costs $60,000 and generates even annual cash inflows of $15,000. What is its payback period?

    Answer: 4 years

    Payback = $60,000 / $15,000 = 4 years.

  5. When NPV and IRR rank two mutually exclusive projects differently, which method should generally be followed?

    Answer: NPV, because it measures absolute value added

    NPV directly measures wealth created and assumes reinvestment at the cost of capital, so it is preferred.

  6. In a capital budgeting analysis, how should a sunk cost incurred last year be treated?

    Answer: Ignored, because it is not affected by the decision

    Sunk costs have already been incurred and cannot change, so they are irrelevant to the decision.

  7. The profitability index is calculated as:

    Answer: Present value of future cash flows divided by initial investment

    A profitability index above 1.0 indicates a positive NPV and is useful when capital is rationed.