FIN 6100 EXAM 3 QUESTIONS WITH 100% CORRECT ANSWERS | LATEST VERSION 2025/2026.

FIN 6100 EXAM 3 QUESTIONS WITH
100% CORRECT ANSWERS | LATEST
VERSION 2025/2026.




What is cash flow? - ANS the cash available to return to investors and other sources of
financing.


what are the 3 main rules of cash flows? - ANS 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? - ANS methods that we use in the evaluation of projects to see
what we want to invest in


5 types of decision rules - ANS 1. Payback Period
2. Discounted Payback Period
3. IRR
4. NPV
5. Profitability index


Pros and Cons of the Payback period method

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, (2, 4) - ANS 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? - ANS that we are earning more than
what it costs us. Making profit.


Pros and Cons of IRR (3, 2) - ANS 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? - ANS Best: NPV


Worst: payback period


Pros and Cons of the NPV method (4, 1) - ANS pros:
- adjusted for timing of cash flows


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