Chapter 6 - Evaluating Financial Impact Flashcards
What is it called when we add interest earned each period to the principal for purposes of computing interest for the next period?
Compound interest
Does compound or simple interest have a greater total value?
Compound interest
What is used by most financial institutions?
Compound interest
What is an equivalent yearly simple interest rate that takes compounding into account?
Annual percentage yield (APY)
What reflects interest being paid on the actual amount borrowed?
Annual percentage rate (APR)
List 5 financial functions that perform calculations that help determine the most feasible financing option
- PMT
- RATE
- NPER
- PV
- FV
Which function finds the value of the payment per period, assuming there are constant payments and a constant interest rate for the duration of the loan?
PMT function
True or False:
Financial functions apply the interest rate per period and the payment per period to the principal value over a specified number of periods
True
When do you use the PMT function?
When you are determining a loan payment
Which function calculates the interest rate per period?
RATE
Which function calculates the number of periods?
NPER
Which function calculates the initial value?
PV
Which function calculates the final value?
FV
Fill in the Blanks:
When using the type argument _ represents the beginning of the period and _ represents the end of the period
- 0
2. 1
What is the amount of money coming into or out of a company each year?
Cash flow
What is the process by which a company spreads the expense of an asset over its useful life?
Depreciation
What is a standard method of detailing a loan transaction?
The amortization schedule
What lists the remaining principal and the value of the payment apportioned to interest expense and to paying down the principal?
The amortization schedule
Which function calculates the value of the interest payment for a specified period?
The IPMT function
Which function calculates the value of the principal payment for a specified period?
The PPMT function
Which function automatically calculates the interest values between a start period and an end period?
The CUMIPMT function
Which function automatically calculates the principal values between a start period and an end period?
The CUMPRINC function
What is an approximation of the actual depreciation allowed by the tax code?
The straight line depreciation method
Which function computes depreciation at an accelerated rate?
The double-declining balance function
What uses expected cash flows and applies a minimum rate of return to discount these cash flows into present value dollars?
Net present value
What considers the cash flows and discounts them back to the present value?
Internal rate of return (IRR)
What calculates the rate at which the discounted cash flows in and out are equal?
Internal rate of return (IRR)
What is the sum of the cash flows, excluding initial investment, divided by the investment value?
Return on investment (ROI)
What is the time it will take to earn sufficient profits so the loan can be paid back?
The payback period
What is the year in which the cumulative total cash flow is greater than or equal to $0?
The payback year
