Finance for Non-Finance Managers Investment Decision Making 2

Question 1

Internal Rate of Return (IRR) is best described as:

Accepted Answer

The discount rate at which a project's NPV equals zero

Answer

IRR is the discount rate that makes the net present value of all cash flows from a project equal to zero.

Question 2

If a project's IRR exceeds the company's required rate of return (hurdle rate), the project should:

Accepted Answer

Be accepted

Answer

If IRR > hurdle rate, the project generates a return above the minimum required, so it should be accepted.

Question 3

Discounting cash flows means:

Accepted Answer

Converting future cash flows to their equivalent value today

Answer

Discounting converts future cash flows to present value using a discount rate that reflects the cost of capital and risk.

Question 4

What is opportunity cost in investment decision making?

Accepted Answer

The return foregone by choosing one investment over the next best alternative

Answer

Opportunity cost is the value of the best alternative that must be given up when making an investment decision.

Question 5

Which of the following describes a sunk cost?

Accepted Answer

A cost already incurred and not recoverable regardless of the decision

Answer

Sunk costs are past expenditures that cannot be recovered and should NOT influence future investment decisions.

Finance for Non-Finance Managers Practice Test