FIN 6100 Exam 3 Questions and Answers Already Passed Latest Update

FIN 6100 Exam 3 Questions and Answers Already Passed Latest Update What is cash flow? - Answers the cash available to return to investors and other sources of financing. what are the 3 main rules of cash flows? - Answers 1. based on Net/after tax cash flows 2. Always adjust for the time value of money 3. must include all cash flows related, including opportunity costs. What are decision rules? - Answers methods that we use in the evaluation of projects to see what we want to invest in 5 types of decision rules - Answers 1. Payback Period 2. Discounted Payback Period 3. IRR 4. NPV 5. Profitability index Pros and Cons of the Payback period method (2, 4) - Answers Pros: - focus on recovering funds quickly - easy to understand/teach Cons: - short term focus at the expense of long term profit - ignores timing and the magnitude of later cash flows. - ignores risk - doesn't allow ranking What does it mean if the IRR is larger than the WACC? - Answers that we are earning more than what it costs us. Making profit. Pros and Cons of IRR (3, 2) - Answers Pros: - incorporates risk of cash flows. - accounts for timing of cash flows - allows for ranking based on return. Cons: - does not show magnitude of earnings. - cannot have more than 1 neg. cash flow. What is the best and worst method for project selection? - Answers Best: NPV Worst: payback period Pros and Cons of the NPV method (4, 1) - Answers pros: - adjusted for timing of cash flows - considers all cash flows - can handle multiple neg. cash flows - considers magnitude always accept the same projects whether using IRR or NPV Cons: - doesn't allow for ranking. What is the solution to the NPV method? - Answers Profitability Index. Allows ranking of projects. Takes the PV of all future cash flows and divides it by the cost of the project. What is Economic Value Added used to do? - Answers evaluate the effectiveness of employees and operating units. Are you generating more worth than we are paying you? What is the difference between after-tax and tax shield? - Answers After-Tax: cash flows left over after paying taxes. Tax Shield: expenses that save you from having to pay as much in taxes. If you are expecting positive cash flows, do you want to use MACRS or straight line depreciation? - Answers MARCS. if you are expecting a loss, use straight line. often used for new businesses with uncertain income.