FINC 3610 Exam 3 2025 – Dismukes Study
Guide & Key Concepts
Net Present Value (NPV) - ANSWER ✨✔---the sum of the present values of expected future cash
flows from an investment, minus the cost of that investment
the most important investment criteria we have
we always choose this option
if it is positive we accept and if it is negative than we reject
the only criteria that gives us a $ amount
Internal Rate of Return (IRR) - ANSWER ✨✔---the discount rate that makes the NPV of an
investment zero
BEWARE:
can results in multiple answerwer from non conventional cash flows.
, result in incorrect decisons from mutually exclusive investments
Modified Internal Rate of Return (MIRR) - ANSWER ✨✔---taking all the money from the projects
and valuing it at the end of the project
IRR based on discounted cash flows
Can also result in incorrect answerwers from mutually exclusive investments
Profitability Index (PI) - ANSWER ✨✔---The present value of an investment's future cash flows
divided by its initial cost. Results in a number you compare to one.
we accept if PI > 1
Make sure you can do PI - ANSWER ✨✔---Examples
NPV, IRR, MIRR, and PI - ANSWER ✨✔---If the project is independent and conventional cash flows
then all four criteria will result in the same answerwer
Payback Rule - ANSWER ✨✔---the length of time it takes to recover our initial investment
The disadvantage is that it is arbitrary.
Does not take into account the time value of money
Discounted Payback Rules - ANSWER ✨✔---The length of time it takes to recover an initial
investment from discounted cash flows.
The disadvantage is that it is arbitrary.
Guide & Key Concepts
Net Present Value (NPV) - ANSWER ✨✔---the sum of the present values of expected future cash
flows from an investment, minus the cost of that investment
the most important investment criteria we have
we always choose this option
if it is positive we accept and if it is negative than we reject
the only criteria that gives us a $ amount
Internal Rate of Return (IRR) - ANSWER ✨✔---the discount rate that makes the NPV of an
investment zero
BEWARE:
can results in multiple answerwer from non conventional cash flows.
, result in incorrect decisons from mutually exclusive investments
Modified Internal Rate of Return (MIRR) - ANSWER ✨✔---taking all the money from the projects
and valuing it at the end of the project
IRR based on discounted cash flows
Can also result in incorrect answerwers from mutually exclusive investments
Profitability Index (PI) - ANSWER ✨✔---The present value of an investment's future cash flows
divided by its initial cost. Results in a number you compare to one.
we accept if PI > 1
Make sure you can do PI - ANSWER ✨✔---Examples
NPV, IRR, MIRR, and PI - ANSWER ✨✔---If the project is independent and conventional cash flows
then all four criteria will result in the same answerwer
Payback Rule - ANSWER ✨✔---the length of time it takes to recover our initial investment
The disadvantage is that it is arbitrary.
Does not take into account the time value of money
Discounted Payback Rules - ANSWER ✨✔---The length of time it takes to recover an initial
investment from discounted cash flows.
The disadvantage is that it is arbitrary.
