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
1 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
, (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
2 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
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
1 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
, (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
2 | Page @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
