Finance for Non-Finance Managers Investment Decision Making 1

Question 1

What is the payback period?

Accepted Answer

The time required for cumulative cash inflows to recover the initial investment

Answer

The payback period measures how long it takes for cash inflows from an investment to repay the original outlay.

Question 2

A project costs $100,000 and generates $25,000 per year. What is its payback period?

Accepted Answer

4 years

Answer

Payback period = $100,000 ÷ $25,000 per year = 4 years.

Question 3

What is the main weakness of the payback period method?

Accepted Answer

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

Answer

The payback period ignores the time value of money and disregards any cash flows that occur after the payback point.

Question 4

Net Present Value (NPV) is positive when:

Accepted Answer

The present value of cash inflows exceeds the initial investment

Answer

A positive NPV means the project's discounted cash inflows exceed the cost, adding value to the firm.

Question 5

Time value of money is based on the principle that:

Accepted Answer

A dollar received today is worth more than a dollar received in the future

Answer

A dollar today can be invested to earn a return, making it worth more than the same dollar received later.

Finance for Non-Finance Managers Practice Test