FIN 302 - Quiz 2 Flashcards
In the Excel FV formula, how do you indicate a annuity due?
Set the type = 1 in the formula.
In future value, payments being made at the beginning of a period are called _____________________.
Annuity Due
In future value, payments being made at the end of the period are called ____________________.
Ordinary Annuity.
In the FV formula in Excel, how do you indicate a ordinary annuity?
Set the type = 0 in the FV formula.
What is the caveat with the NPV function in Excel?
The NPV function does not really provide you the Net Present Value (NPV). To get this you have to add the original investment. Example formula: =B5 + NPV($B$2, B6:B10).
What is a perpetuity?
A annuity that goes on forever.
What is the difference between an annuity and cash flows?
Annuity has an equal amount of payments. When the amount of the payment varies then it is just cash flows.
When calculating the payment (PMT) in Excel, what must you do to ensure you get a positive number?
Put a negative “-“ in the future value part of the formula.
What is the definition of IRR?
The Internal Rate of Return (IRR) is the rate which makes NPV = 0.
What is a major difference between the uses of the NPV and IRR functions in Excel?
For NPV you DO NOT include the original investment into the range in the function. With IRR, you DO include the original investment amount.
What are two things you MUST have set up before you use data tables?
1) Ensure the formula you are going to use is in the upmost top-left corner of the range you are going to use in the data table. 2) Ensure you have selected the full range first before going into the data tables menu.
When comparing NPV and IRR for two different projects you notice that Project A has a higher NPV while Project B has a higher IRR. What project do you pick.
Project A. NPV should be chosen over IRR as it will maximize your wealth.
When do you want to use XNPV and XIRR compared to NPV and IRR?
Use XNPV and XIRR when calculating time periods that are periodic.
