Chapter 6 - Evaluating Financial Impact

Question 1

What is it called when we add interest earned each period to the principal for purposes of computing interest for the next period?

Answer 1

Compound interest

Question 2

Does compound or simple interest have a greater total value?

Answer 2

Compound interest

Question 3

What is used by most financial institutions?

Answer 3

Compound interest

Question 4

What is an equivalent yearly simple interest rate that takes compounding into account?

Answer 4

Annual percentage yield (APY)

Question 5

What reflects interest being paid on the actual amount borrowed?

Answer 5

Annual percentage rate (APR)

Question 6

List 5 financial functions that perform calculations that help determine the most feasible financing option

Answer 6

1. PMT
2. RATE
3. NPER
4. PV
5. FV

Question 7

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?

Answer 7

PMT function

Question 8

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

Answer 8

True

Question 9

When do you use the PMT function?

Answer 9

When you are determining a loan payment

Question 10

Which function calculates the interest rate per period?

Answer 10

RATE

Question 11

Which function calculates the number of periods?

Answer 11

NPER

Question 12

Which function calculates the initial value?

Answer 12

PV

Question 13

Which function calculates the final value?

Answer 13

FV

Question 14

Fill in the Blanks:

When using the type argument _ represents the beginning of the period and _ represents the end of the period

Answer 14

1. 0

2. 1

Question 15

What is the amount of money coming into or out of a company each year?

Answer 15

Cash flow

Question 16

What is the process by which a company spreads the expense of an asset over its useful life?

Answer 16

Depreciation

Question 17

What is a standard method of detailing a loan transaction?

Answer 17

The amortization schedule

Question 18

What lists the remaining principal and the value of the payment apportioned to interest expense and to paying down the principal?

Answer 18

The amortization schedule

Question 19

Which function calculates the value of the interest payment for a specified period?

Answer 19

The IPMT function

Question 20

Which function calculates the value of the principal payment for a specified period?

Answer 20

The PPMT function

Question 21

Which function automatically calculates the interest values between a start period and an end period?

Answer 21

The CUMIPMT function

Question 22

Which function automatically calculates the principal values between a start period and an end period?

Answer 22

The CUMPRINC function

Question 23

What is an approximation of the actual depreciation allowed by the tax code?

Answer 23

The straight line depreciation method

Question 24

Which function computes depreciation at an accelerated rate?

Answer 24

The double-declining balance function

Question 25

What uses expected cash flows and applies a minimum rate of return to discount these cash flows into present value dollars?

Answer 25

Net present value

Question 26

What considers the cash flows and discounts them back to the present value?

Answer 26

Internal rate of return (IRR)

Question 27

What calculates the rate at which the discounted cash flows in and out are equal?

Answer 27

Internal rate of return (IRR)

Question 28

What is the sum of the cash flows, excluding initial investment, divided by the investment value?

Answer 28

Return on investment (ROI)

Question 29

What is the time it will take to earn sufficient profits so the loan can be paid back?

Answer 29

The payback period

Question 30

What is the year in which the cumulative total cash flow is greater than or equal to $0?

Answer 30

The payback year