This deck is about how companies actually decide where to put their money, using ideas like the time value of money, net present value, and internal rate of return. These concepts sound abstract until you realize interviewers use them to test whether you can reason about a decision the way a finance team actually would. Expect a mix of "what does this term mean" and "how would you use it to make a call," both of which come up in real interviews.
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Card 1 of 17
What is the time value of money, and why does it matter?
A dollar today is worth more than a dollar later, because today's dollar can already be earning a return.
Money in hand today is worth more than the same amount later, because it can be invested right away to start earning a return, and because inflation and risk chip away at what a future dollar can actually buy. This is the foundational idea behind discounting, NPV, and virtually every valuation method bankers build: you can't compare a dollar today to a dollar in five years, or line up cash flows from different points in a deal timeline, without adjusting for that gap first.
Card 2 of 17
What does “opportunity cost” mean, and why does it come up in almost every finance decision?
Opportunity cost is the value of the best thing you gave up in order to do the thing you chose.
Opportunity cost is the value of the next-best option you passed up when you committed money, time, or people to something else. If Calder Foods puts $10mm into a new depot, the real cost isn’t only the $10mm, it’s whatever that $10mm would have earned in its best alternative use, maybe paying down debt or upgrading an existing line. That’s why finance rarely asks “is this good?” and almost always asks “is this better than the next thing we could do with the same money?”, and it’s the reason a discount rate exists at all.
Card 3 of 17
A client sees $100,000 due in three years shown as roughly $79,000 on your summary page and asks why. What’s the difference between present value and future value?
Future value grows a sum forward at a rate, present value shrinks a future sum back to today.
Future value asks what a sum today becomes if it grows at some rate, so $79,000 growing at 8% a year turns into about $100,000 in three years. Present value runs the same arithmetic backwards, asking what a future sum is worth in today’s dollars, so $100,000 three years out discounted at 8% is that same $79,000. They are two views of one relationship, and the rate is what links them. Models are almost always built in present value, because that is the only basis on which cash flows from different years can be added together.
Card 4 of 17
What’s the difference between simple and compound interest, and why does compounding matter so much over a long horizon?
Simple interest earns only on the original sum, compound interest earns on the interest as well.
Simple interest pays a fixed amount on the original principal every period, so $1,000 at 10% simple interest earns $100 a year and reaches $2,000 after ten years. Compound interest pays on the principal plus all the interest already earned, so year two earns 10% on $1,100 rather than on $1,000, and after ten years the same $1,000 is worth about $2,594. The gap widens the longer money sits, and that is the engine underneath discounting: if money grows on a compounded basis going forward, it has to be brought back on a compounded basis too.
Card 5 of 17
You’re setting up the discounting row on a project model and an intern asks where the 9% came from. What does a discount rate actually represent?
A discount rate is the return available elsewhere at the same risk, so it sets the price of waiting.
A discount rate is the annual return an investor could earn from an alternative use of the same money at the same level of risk, and it is what converts future dollars into today’s dollars. Two things push it up: the plain cost of waiting, which even a risk-free government bond compensates you for, and a risk premium for the chance the cash never shows up at all. So that 9% is really a claim about how risky this project’s cash flows are. Move it a point or two and the present value swings noticeably, which is why it is usually the first assumption an MD questions.
Card 6 of 17
You're on the deal team pitching Bramwell & Co., a mid-market packaging manufacturer, on a $40mm plant expansion. Your VP asks you to walk him through what Net Present Value is and how you'd use it to tell the client whether the expansion is worth funding.
NPV converts a project's future cash flows into today's dollars and nets out what it cost to get started.
NPV takes the expansion's expected future cash flows, discounts each one back to present value using Bramwell's cost of capital, and adds them all up. Then it subtracts the initial $40mm outlay, leaving the net value the project is actually expected to create. The decision rule follows directly: recommend the project if NPV is positive, since it's expected to earn more than the cost of capital, and recommend against it if NPV is negative.
Card 7 of 17
What is the payback period, and what's its main limitation?
Payback period tells you how fast you get your money back, but ignores everything after that.
The payback period is simply how long it takes for a project's cumulative cash flows to add back up to the initial investment. Its main blind spot is that it ignores the time value of money, treating a dollar in year one the same as a dollar in year four, and it ignores any cash flows after the payback point. Bankers will sometimes use it as a quick sanity-check gut number, but it's usually paired with NPV or IRR rather than used as a stand-alone decision tool.
Card 8 of 17
You're building the returns page for a leveraged buyout of Ferrow Retail ahead of the investment committee meeting. The senior associate asks you to explain what the IRR line in the model actually represents.
IRR is the discount rate that makes a deal's NPV exactly zero, its own break-even return.
IRR is the discount rate at which the deal's projected cash flows produce an NPV of exactly zero, so it's essentially the LBO's built-in break-even rate of return. To judge whether the Ferrow Retail deal clears the bar, you'd compare its IRR against the fund's required return, or hurdle rate: if the projected IRR beats that hurdle, the deal is generally worth pursuing.
Card 9 of 17
Northbay Logistics has already spent $6mm on a warehouse build that now looks marginal, and the CFO says they can’t walk away after committing that much. Where’s the flaw in that reasoning?
Money already spent and unrecoverable should have no weight in a go or no-go decision made today.
The $6mm is a sunk cost, meaning it is gone whether Northbay finishes the warehouse or stops this afternoon, so no decision made now can bring it back. The only question that matters is whether the cash still to be spent will create more value than that same cash would somewhere else, which means running the NPV on the remaining outlay and the remaining cash flows and leaving the $6mm out entirely. Interviewers like this one because the instinctive answer, protecting money already committed, is precisely the wrong one.
Card 10 of 17
Why do riskier investments have to offer higher expected returns?
Nobody takes on more uncertainty for free, so higher risk has to come with a higher required return.
An investor can always park money somewhere very safe, such as short-term government debt, so anything with a real chance of losing money has to offer more than that to attract funding at all. The extra return demanded on top of that risk-free rate is the risk premium, and it grows with how uncertain the payoff is. Notice that this is an expected return rather than a promise: a risky project offers a higher return precisely because it might not deliver one. Every hurdle rate and every discount rate you build is an application of this single idea.
Card 11 of 17
Your MD wants a one-line capital structure summary for Halloway Industrial ahead of tomorrow's board deck: how much of the balance sheet is funded with debt versus equity, and why the mix is worth flagging.
Capital structure is just the mix of debt and equity a company uses to fund itself.
Capital structure is the mix of debt and equity Halloway uses to fund its operations and growth. That mix matters because it shapes the company's cost of capital, risk, and flexibility: debt is generally cheaper and doesn't dilute ownership, but it comes with fixed repayment obligations regardless of how the business performs, while equity carries no repayment obligation but costs more and dilutes existing owners.
Card 12 of 17
Your MD asks you to sanity-check the WACC on the Corven Aerospace model before the 9am call. Walk him through what "cost of capital" actually means and why it's the number sitting at the center of that check.
Cost of capital is the minimum return a company must earn on anything it invests in, or it's destroying value.
Cost of capital is the return Corven has to offer to attract funding, whether that's interest paid to lenders (cost of debt) or the return shareholders expect (cost of equity), and it rises with how risky investors perceive the company to be. Think of it as a hurdle rate: any project or investment Corven takes on needs to earn more than this just to be worth doing, which is exactly why a WACC that's out of line with the company's risk profile is worth flagging before it goes in front of the client.
Card 13 of 17
A junior notices the Marden Chemical model carries cost of debt at 5% and cost of equity at 11%, and asks why equity is the more expensive of the two. What do you tell her?
Equity holders are paid last and promised nothing, so they demand a bigger return than lenders do.
Lenders sit at the front of the line. They are owed a contractual interest payment, they get repaid before shareholders see anything, and if the company fails their claim is settled first, so their risk is lower and the return they will accept is lower. Shareholders are last in line, with no promised payment and no guarantee of getting their money back, and they price that uncertainty into a higher required return. Interest is also usually tax-deductible while dividends are not, which pushes the effective cost of debt lower still.
Card 14 of 17
What is the difference between systematic and unsystematic risk?
Systematic risk hits the whole market and can't be diversified away; unsystematic risk is company-specific and can.
Systematic risk is market-wide, things like interest rate moves or a recession, and it affects nearly every asset at once, so no amount of diversification eliminates it. Unsystematic risk is specific to a single company or industry, like a product recall or a lawsuit, and this is the risk diversification actually protects against: spread your holdings widely enough, and one asset's specific problems just get absorbed by the others. It's also why beta in a WACC calculation only ever measures the systematic piece.
Card 15 of 17
Two mutually exclusive projects land on your desk: one has the higher NPV, the other the higher IRR, and you can only fund one. Your VP asks which you’d recommend and why.
When NPV and IRR disagree on projects you must choose between, follow the NPV.
IRR is a percentage, so it says nothing about how much money is actually at stake, and a small project can post a spectacular rate of return while creating less value than a large project earning a modest one. IRR also quietly assumes interim cash flows get reinvested at the IRR itself, which is usually optimistic, and it can produce more than one answer when cash flows swing between negative and positive. NPV measures dollars of value created at the company’s real cost of capital, so when the two conflict, NPV is the one you follow.
Card 16 of 17
Ardsley Media is sitting on $200mm of cash with no obvious acquisition in sight. Your MD asks you to lay out what management can actually do with it.
Spare cash can be reinvested, used to cut debt, or handed back, and the best use is whatever earns most.
There are four basic doors. Ardsley can reinvest in the business through new projects, capacity, or an acquisition, which is the right call whenever those uses have a positive NPV. It can pay down debt, lowering interest expense and financial risk. Or it can return the cash to shareholders, either as a dividend or by buying back its own shares. The discipline underneath all of it is that reinvestment only wins if it clears the cost of capital, since a company earning less than that on new projects is destroying value and would serve its owners better by handing the money back.
Card 17 of 17
What’s the difference between paying a dividend and buying back stock, and why might a company prefer one over the other?
Both hand cash to shareholders, but a dividend pays everyone while a buyback shrinks the share count.
A dividend is a cash payment made to every shareholder on a per-share basis, and once a company starts one, cutting it later reads as a distress signal, so the market treats it as close to a commitment. A buyback has the company purchase its own shares in the market, which reduces the share count so each remaining share owns a larger slice of the same business, and it can be slowed or paused quietly. Buybacks therefore give management more flexibility, though they only create value if the shares are bought below what they are actually worth.
Reading is not the same as remembering. Study this deck with scheduled review so the cards come back before you forget them.