30 Questions
What is the PMT key on the calculator used for?
Calculating the equal payment
How do you switch your calculator between an ordinary annuity and an annuity due?
Using the 2nd BGN 2nd Set on the TI BA-II Plus
What is the formula to find the present value of an annuity?
PV = PMT * (1 - (1 + r)^(-n)) / r
What is the present value of the annuity in the example?
GHS 23,999.54
How much can you borrow if you can afford to pay GHS 632 per month towards a new sports car?
GHS 23,999.54
What is the monthly payment if you borrow GHS 20,000 at 8% per year, compounded monthly, for 4 years?
GHS 551.61
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
When might the NPV and IRR methods give different decisions?
When the cash flows change sign more than once
What is a limitation of using IRR when evaluating projects?
It can have multiple IRRs when cash flows change sign more than once
What should you consider when evaluating projects using IRR?
The scale of the initial investments and the timing of cash flows
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
Why is IRR not a primary decision criteria?
Because it does not consider the risk of cash flows
What is NPV a direct measure of?
The increase in value to the firm
When should IRR be used with caution?
When the cash flows are nonconventional
What does a profitability index of 1.1 imply?
For every $1 of investment, we create an additional $0.10 in value
What is the primary advantage of the profitability index?
It is easy to understand and communicate
What is the primary disadvantage of the payback period method?
It ignores the time value of money
What is the average accounting return (AAR) measure of?
The accounting profit relative to book value
What is the total return of an investment equal to?
Expected return + systematic portion + unsystematic portion
What is the primary goal of diversification in a portfolio?
To reduce the variability of returns without an equivalent reduction in expected returns
What is the risk that cannot be eliminated by diversification?
Systematic risk
According to the Systematic Risk Principle, what is the reward for bearing risk?
Only for systematic risk
What is the total risk of a portfolio equal to?
Systematic risk + unsystematic risk
Why is it important to diversify a portfolio across different industries?
To reduce the risk of the portfolio
What is the reward-to-risk ratio for an asset that plots above the Security Market Line?
Greater than 1
What is the slope of the Security Market Line (SML) equal to?
E(RM) – Rf
What is βA in the CAPM formula?
The systematic risk of the asset
What does the market risk premium measure?
The reward for bearing systematic risk
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
What does the CAPM formula assume about the market?
The market is in equilibrium
Learn how to calculate annuities using a calculator and spreadsheet. Understand the difference between ordinary annuity and annuity due, and how to switch between them on your calculator. Practice solving problems with present values on a spreadsheet.
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