FIN 6100 Exam 3 (100% Verified) Questions & Answers Latest Update
FIN 6100 Exam 3 (100% Verified) Questions
& Answers Latest Update
What is cash flow? - ✔-the cash available to return to investors and other sources of financing.
what are the 3 main rules of cash flows? - ✔-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? - ✔-methods that we use in the evaluation of projects to see what we want to
invest in
5 types of decision rules - ✔-1. Payback Period
2. Discounted Payback Period
3. IRR
4. NPV
5. Profitability index
Pros and Cons of the Payback period method
(2, 4) - ✔-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
FIN 6100 Exam 3 (100% Verified) Questions & Answers Latest Update
, FIN 6100 Exam 3 (100% Verified) Questions & Answers Latest Update
- doesn't allow ranking
What does it mean if the IRR is larger than the WACC? - ✔-that we are earning more than what it costs
us. Making profit.
Pros and Cons of IRR (3, 2) - ✔-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? - ✔-Best: NPV
Worst: payback period
Pros and Cons of the NPV method (4, 1) - ✔-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? - ✔-Profitability Index.
FIN 6100 Exam 3 (100% Verified) Questions & Answers Latest Update
FIN 6100 Exam 3 (100% Verified) Questions
& Answers Latest Update
What is cash flow? - ✔-the cash available to return to investors and other sources of financing.
what are the 3 main rules of cash flows? - ✔-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? - ✔-methods that we use in the evaluation of projects to see what we want to
invest in
5 types of decision rules - ✔-1. Payback Period
2. Discounted Payback Period
3. IRR
4. NPV
5. Profitability index
Pros and Cons of the Payback period method
(2, 4) - ✔-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
FIN 6100 Exam 3 (100% Verified) Questions & Answers Latest Update
, FIN 6100 Exam 3 (100% Verified) Questions & Answers Latest Update
- doesn't allow ranking
What does it mean if the IRR is larger than the WACC? - ✔-that we are earning more than what it costs
us. Making profit.
Pros and Cons of IRR (3, 2) - ✔-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? - ✔-Best: NPV
Worst: payback period
Pros and Cons of the NPV method (4, 1) - ✔-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? - ✔-Profitability Index.
FIN 6100 Exam 3 (100% Verified) Questions & Answers Latest Update
