Annuities Calculator and Spreadsheet

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What is the PMT key on the calculator used for?

Figuring out the number of years

Finding the present value

Calculating the equal payment (correct)

Determine the discount rate

How do you switch your calculator between an ordinary annuity and an annuity due?

Using the PMT key

Using the FV key

Using the 2nd BGN 2nd Set on the TI BA-II Plus (correct)

Using the PV key

What is the formula to find the present value of an annuity?

PV = FV / (1 + r)^n

PV = FV * (1 + r)^(-n)

PV = PMT * (1 - (1 + r)^(-n)) / r (correct)

PV = PMT / (1 + r)^n

What is the present value of the annuity in the example?

GHS 23,999.54 Signup and view all the answers

How much can you borrow if you can afford to pay GHS 632 per month towards a new sports car?

GHS 23,999.54 Signup and view all the answers

What is the monthly payment if you borrow GHS 20,000 at 8% per year, compounded monthly, for 4 years?

GHS 551.61 Signup and view all the answers

What is an advantage of using the Internal Rate of Return (IRR) rule?

It is a simple way to communicate the value of a project Signup and view all the answers

When might the NPV and IRR methods give different decisions?

When the cash flows change sign more than once Signup and view all the answers

What is a limitation of using IRR when evaluating projects?

It can have multiple IRRs when cash flows change sign more than once Signup and view all the answers

What should you consider when evaluating projects using IRR?

The scale of the initial investments and the timing of cash flows Signup and view all the answers

What is a characteristic of IRR when evaluating projects with nonconventional cash flows?

There is more than one IRR when the cash flows change sign more than once Signup and view all the answers

Why is IRR not a primary decision criteria?

Because it does not consider the risk of cash flows Signup and view all the answers

What is NPV a direct measure of?

The increase in value to the firm Signup and view all the answers

When should IRR be used with caution?

When the cash flows are nonconventional Signup and view all the answers

What does a profitability index of 1.1 imply?

For every $1 of investment, we create an additional $0.10 in value Signup and view all the answers

What is the primary advantage of the profitability index?

It is easy to understand and communicate Signup and view all the answers

What is the primary disadvantage of the payback period method?

It ignores the time value of money Signup and view all the answers

What is the average accounting return (AAR) measure of?

The accounting profit relative to book value Signup and view all the answers

What is the total return of an investment equal to?

Expected return + systematic portion + unsystematic portion Signup and view all the answers

What is the primary goal of diversification in a portfolio?

To reduce the variability of returns without an equivalent reduction in expected returns Signup and view all the answers

What is the risk that cannot be eliminated by diversification?

Systematic risk Signup and view all the answers

According to the Systematic Risk Principle, what is the reward for bearing risk?

Only for systematic risk Signup and view all the answers

What is the total risk of a portfolio equal to?

Systematic risk + unsystematic risk Signup and view all the answers

Why is it important to diversify a portfolio across different industries?

To reduce the risk of the portfolio Signup and view all the answers

What is the reward-to-risk ratio for an asset that plots above the Security Market Line?

Greater than 1 Signup and view all the answers

What is the slope of the Security Market Line (SML) equal to?

E(RM) – Rf Signup and view all the answers

What is βA in the CAPM formula?

The systematic risk of the asset Signup and view all the answers

What does the market risk premium measure?

The reward for bearing systematic risk Signup and view all the answers

What is the relationship between the reward-to-risk ratio and the Security Market Line?

The reward-to-risk ratio is the slope of the SML Signup and view all the answers

What does the CAPM formula assume about the market?

The market is in equilibrium Signup and view all the answers