Free CFA Level I Corporate Issuers Practice Questions

NPV is calculated by discounting all expected future cash flows at the required rate of return and subtracting the initial investment. A positive NPV means the project adds value to the firm. Choice C describes a simple payback-like calculation that ignores the time value of money, which is the fundamental concept underlying NPV. Choice B describes the internal rate of return (IRR), not NPV; the IRR is the rate that makes NPV equal to zero.

Extending trade credit terms gives customers more time to pay, increasing days of sales outstanding (DSO) and the accounts receivable balance. Since CCC = DOH + DSO − DPO, a higher DSO lengthens the cash conversion cycle, meaning the company must finance its working capital for a longer period.
Choice B is incorrect because more lenient terms increase, not decrease, receivables.
Choice C is incorrect because trade credit terms directly affect when customers pay, which is a primary driver of DSO and the cash conversion cycle.

The annualized cost of forgoing the discount = [0.01 / (1 - 0.01)] x [365 / (45 - 15)] = [0.01 / 0.99] x [365 / 30] = 0.01010 x 12.17 = 12.3%. Since 12.3% exceeds the company's 6% borrowing rate, it is cheaper to borrow at 6% and take the discount. The 1% nominal size is not the correct comparison; the annualized rate is what matters. Taking the discount by paying early shortens the CCC rather than lengthening it, making the third choice factually incorrect.