Professional Documents
Culture Documents
TRUE/FALSE
2. When you borrow money from a bank to make a purchase, you must pay back the amount borrowed
plus an additional amount known as principal.
3. Most financial instruments, such as loans and CDs, use compound interest.
4. Financial institutions advertise their loan interest rates in what is referred to as an annual loan plan, or
ALP.
5. The PMT function finds the value of the payment per period, assuming that there are constant
payments and a constant interest rate for the duration of the loan.
7. $10,000 compounded 1 time at 4% per period is different from $10,000 compounded 4 times at 1% per
period; the latter results in a higher value.
10. The present value is the amount, or initial outlay, at the beginning of the transaction.
11. A down payment is money required from the lender toward the purchase of an asset.
13. Depreciation must be added to the cash flow in each year to calculate taxes for that year, but then must
be subtracted because it is not actually a cash flow in that year.
14. The fv argument is the value at the end of the financial transaction.
16. In Excel 2013, using the Define Name button and then typing a name in the Name field allows the user
to specify a named range scope.
17. The net present value is an interest rate chosen to reflect not only the time value of money, but the
desired returns the company expects for the level of risk being taken.
18. The IRR method calculates the rate at which discounted cash flows in and out are equal, essentially
where the NPV is $0.
19. ROI is the sum of the cash flows, including the initial investment, divided by the investment value.
20. Chart data series ranges include both sheet names and absolute cell references.
MODIFIED TRUE/FALSE
ANS: F, principal
2. The rate per period is the monthly rate divided by the number of periods per year.
_________________________
ANS: F
annual
yearly
3. PV solves for the final value, which is the amount in or out at the end of the financial transaction.
_________________________
ANS: F
FV
fv
ANS: F
pv
[pv]
5. To calculate an interest rate, you can use the INTEREST function. _________________________
ANS: F
RATE
rate
7. When calculating taxes in the United States, a company can subtract from income only the principal
portion of a loan payment. _________________________
ANS: F, interest
8. The IPMT function calculates the value of the interest payment for a specified period.
_________________________
ANS: F
CUMIPMT
cumipmt
PTS: 1 REF: 387
10. Bottom line depreciation basically allocates the value of an asset evenly throughout the life of the
asset. _________________________
ANS: F
Straight line
Straight-line
11. Range names must start with a letter, an underscore, or a(n) backslash. _________________________
12. The variable-declining balance method returns the depreciation of an asset for a specified period.
_________________________
ANS: F, fixed
13. NPV enables you to see the current worth of the projected cash flows, which helps you to determine
the profitability of the venture. _________________________
14. The NPV function in Excel takes the cash flow from year 0, which is referred to as value0, and
discounts the value by one year. _________________________
ANS: F
1
one
15. The values argument in the IRR function is a list of positive and negative cash flows.
_________________________
MULTIPLE CHOICE
1. ____ is like a user fee because you are paying to “use” the bank’s money.
a. Interest c. Cash flow
b. Principal d. Depreciation
ANS: A PTS: 1 REF: 360
4. Adding interest earned each period to the principal for purposes of computing interest for the next
period is known as ____ interest.
a. compound c. complex
b. simple d. principal
ANS: A PTS: 1 REF: 361
5. ____ is the equivalent of a yearly simple interest rate, taking into account compounding.
a. Annual percentage yield c. Annual compound interest
b. Annual cash flow d. Annual simple interest
ANS: A PTS: 1 REF: 362
6. The APR reflects the ____ being paid on the actual amount borrowed.
a. principal c. cash flow
b. interest d. depreciation
ANS: B PTS: 1 REF: 362
7. The ____ function finds the value of the payment per period, assuming that there are constant
payments and a constant interest rate for the duration of the loan.
a. PAY c. PAYMENT
b. CASH d. PMT
ANS: D PTS: 1 REF: 368
8. In a PMT function, the ____ argument is the interest rate per compounding period.
a. rate c. pv
b. nper d. type
ANS: A PTS: 1 REF: 364
10. In a PMT function, the ____ argument is the original principal value at the beginning of the financial
transaction.
a. rate c. pv
b. nper d. type
ANS: C PTS: 1 REF: 364
11. In a PMT function, the ____ argument designates when payments are made.
a. rate c. fv
b. nper d. type
ANS: D PTS: 1 REF: 364
12. In a PMT function, the ____ argument is the value at the end of the financial transaction.
a. rate c. fv
b. nper d. type
ANS: C PTS: 1 REF: 364
13. Cash amounts that are either received or paid out during the course of the financial transaction are
often referred to as ____.
a. cash flow c. in and out money
b. cash movement d. business money
ANS: A PTS: 1 REF: 365
16. When used in the PMT function, the comma in 1,000 is interpreted as ____.
a. the beginning of a new argument c. part of the number
b. the end of a new argument d. none of the above
ANS: A PTS: 1 REF: 367
17. In financial functions, the default transaction (type ____) indicates payments are made at the end of
each period.
a. 0 c. 1
b. - d. end
ANS: A PTS: 1 REF: 368
18. In financial functions, type ____ indicates payments are made at the beginning of each period.
a. 0 c. 1
b. - d. start
ANS: C PTS: 1 REF: 369
20. A bank account would have an fv equal to the ____ plus any accrued interest, plus or minus any
payments into or out of the account.
a. pv c. pmt
b. rate d. fv
ANS: A PTS: 1 REF: 369
21. If you are calculating payments to a bank (a negative cash flow), your formula requires a positive
____.
a. present value (pv) c. present value (pv) and future value (fv)
b. future value (fv) d. any of the above
ANS: D PTS: 1 REF: 370
22. If you are calculating a positive future value (money being withdrawn from a bank, which is a positive
cash flow), your formula requires a negative ____.
a. present value (pv) c. present value (pv) and payment (pmt)
b. payment (pmt) d. any of the above
ANS: D PTS: 1 REF: 370
23. A house that costs $200,000 and requires a 10% down payment would have an original loan value (pv)
of ____.
a. $180,000 c. $210,000
b. $190,000 d. $220,000
ANS: A PTS: 1 REF: 375
25. ____ include(s) points, loan application fees, or any other fee that the borrower must pay up front.
a. Mortgage loans c. Upfront interest
b. Mortgage interest d. none of the above
ANS: D PTS: 1 REF: 375
26. To account for a down payment, adjust the ____ of the loan by subtracting it from the loan amount.
a. present value (pv) c. rate
b. future value (fv) d. type
ANS: A PTS: 1 REF: 375
27. Taxes are calculated based on _____ income, which excludes certain elements that are cash flows and
includes other non-cash flow items.
a. regular c. standard
b. taxable d. itemized
ANS: B PTS: 1 REF: 380
29. Depreciation is the process by which a company spreads the ____ of an asset over its useful life.
a. value c. both a and b
b. expense d. neither a nor b
ANS: B PTS: 1 REF: 381
30. Depreciation needs to be _____ the cash flow in each year to calculate taxes for that year.
a. added to c. either a or b
b. subtracted from d. neither a nor b
ANS: B PTS: 1 REF: 381
31. After the ____ and depreciation have been deducted, taxes can be calculated.
a. interest expense c. liabilities
b. assets d. all of the above
ANS: A PTS: 1 REF: 381
32. A standard method of detailing a loan transaction is to set up what is known as a(n) ____.
a. amortization table c. depreciation table
b. mortgage table d. cash flow table
ANS: A PTS: 1 REF: 383
33. The PPMT function calculates the value of the ____ for a specified period.
a. principal payment c. either a or b
b. interest payment d. neither a nor b
ANS: A PTS: 1 REF: 385
34. The ____ function calculates the value of the interest payment for a specified period.
a. PPMT c. INMT
b. IPMT d. RATE
ANS: B PTS: 1 REF: 385
35. In the PPMT function, the per-argument periods begin at 1 and end at the last payment period, which
equals ____.
a. nper c. pv
b. fv d. rate
ANS: A PTS: 1 REF: 385
36. In the function =IPMT(B$3/B$5,A11,B$4*B$5,B$2,B$6,0), the entry “B$6” represents the ____.
a. rate c. pv
b. per d. fv
ANS: D PTS: 1 REF: 385
37. In the function =IPMT(B$3/B$5,A11,B$4*B$5,B$2,B$6,0), the only argument that will vary when
copied down a column will be the ____.
a. nper c. pv
b. per d. fv
ANS: B PTS: 1 REF: 385
38. ____ returns the cumulative interest paid on a loan between start_period and end_period.
a. CUMIPMT c. IPMTCUM
b. CUMPMT d. CUMINT
ANS: A PTS: 1 REF: 387
39. ____ returns the cumulative principal paid on a loan between start_period and end_period.
a. CUMPRINC c. PRINCUM
b. ICUMPR d. CUMPRI
ANS: A PTS: 1 REF: 387
40. ____ depreciation basically allocates the value of an asset evenly throughout the life of the asset.
a. Complex c. Straight line
b. Compound d. Even
ANS: C PTS: 1 REF: 390
41. In the SLN function, the _____ argument is the initial cost of the asset.
a. cost c. value
b. price d. pv
ANS: A PTS: 1 REF: 391
42. In the SLN function, the _____ argument is the value at the end of depreciation.
a. end c. salvage
b. life d. sell
ANS: C PTS: 1 REF: 391
43. In the SLN function, the _____ argument is the number of periods over which the asset is depreciated.
a. periods c. number
b. life d. sell
ANS: B PTS: 1 REF: 391
44. Named ranges can be named and then specified as either a workbook scope or to a specific ____.
a. worksheet c. chart
b. table d. file
ANS: A PTS: 1 REF: 393
45. The depreciation method that computes depreciation at an accelerated rate with depreciation being
highest in the first period and decreasing in successive periods is ____.
a. variable-declining balance c. sum of the years digits
b. fixed-declining balance d. double-declining balance
ANS: D PTS: 1 REF: 394
47. The depreciation method where depreciation is apportioned based on a declining fractional amount of
the asset’s life is the ____ method.
a. variable-declining balance c. sum of the years digits
b. fixed-declining balance d. double-declining balance
ANS: C PTS: 1 REF: 395
48. The depreciation method with the formula =DB(cost,salvage,life,period,[month]) is the ____ method.
a. variable-declining balance c. sum of the years digits
b. fixed-declining balance d. double-declining balance
ANS: B PTS: 1 REF: 395
49. The ____ depreciation method calculates interest as highest in the first period and decreases in amount
each period thereafter.
a. double-declining balance c. sum of the years digits
b. fixed-declining balance d. variable-declining balance
ANS: A PTS: 1 REF: 394
50. To apply a range name globally, make sure that Workbook is selected as the ____ box.
a. Name c. Range
b. Breadth d. Scope
ANS: D PTS: 1 REF: 396
51. The function =-ROUND(Taxrate*C16,0) will round taxes to the nearest ____.
a. dollar c. penny
b. dime d. none of the above
ANS: A PTS: 1 REF: 396
52. ____ is preferred by most financial theorists because it uses the expected cash flows and applies a
minimum rate of return to discount these cash flows into current (present) value dollars.
a. NPV c. EPP
b. EPS d. IRR
ANS: A PTS: 1 REF: 404
55. NPV requires that value1, value2, value3, and so on must be equally spaced in time and occur at ____.
a. the end of each period c. the beginning of each period
b. the end of the year d. the beginning of the year
ANS: A PTS: 1 REF: 404
56. When using the NPV function in Excel, the first cash flow into or out of the financial transaction is
assumed to be ____.
a. one year from now c. today
b. one month from now d. tomorrow
ANS: A PTS: 1 REF: 405
57. Using the NPV function, you can write a formula to determine the net present value of the income
flows for a project, including the initial investment, as follows: ____.
a. –Initial Investment+NPV c. NPV+Initial investment
b. –NPV+Initial investment d. none of the above
ANS: A PTS: 1 REF: 405
58. In projects where cash flows are negative at both the beginning and the end of the project life, the
results of the NPV and IRR are often ____.
a. similar c. error-generating
b. contradictory d. none of the above
ANS: B PTS: 1 REF: 407
60. The ____ method calculates the rate at which discounted cash flows in and out are equal.
a. IRR c. both a and b
b. NPV d. neither a nor b
ANS: A PTS: 1 REF: 407
62. In the IRR function, the guess argument is optional and should not be needed, but can be used if the
____ iterations that are automatically performed by Excel do not result in an accurate value.
a. 10 c. 20
b. 15 d. 25
ANS: C PTS: 1 REF: 408
64. The best chart to show a functional relationship, such as hurdle rate versus NPV, is ____.
a. an X plot c. a Y plot
b. an XY Scatter d. a pie chart
ANS: B PTS: 1 REF: 409
65. Stockholders often look at the ____ as a quick measure of how attractive a company’s stock is versus
other stocks within the industry.
a. ROI c. FV
b. NPV d. ROR
ANS: A PTS: 1 REF: 410
66. ROI is the ____, excluding the initial investment, divided by the investment value.
a. sum of cash flows c. sum of principal payments
b. market value d. asset value minus depreciation
ANS: A PTS: 1 REF: 410
67. The payback year is the year in which the cumulative total cash flow is greater than or equal to ____.
a. $0 c. the amount of the last payment
b. the value of the business d. the original loan amount
ANS: A PTS: 1 REF: 411
69. Excel provides a method to automatically calculate the payback period, but it is a somewhat complex
process that involves using the ____ reference function and calculating a cumulative total.
a. MATCH c. CALCULATE
b. LINK d. ISNUMBER
ANS: A PTS: 1 REF: 412
70. Which formula from the list below can be copied across a row to create a row of cumulative totals?
a. =SUM($C24:C24)>0 c. MATCH($C24:C24)>0)
b. IF($C24:C24)>0 d. =SUM($C$24:$C$24)>0
ANS: A PTS: 1 REF: 412
71. Phil enters the tax rate of 35% in the workbook as a range named Taxrate without first entering the
value itself in the workbook. In Excel, you can give a value a range name without actually entering the
value in a specific cell. To do so, you use the ____ dialog box.
a. New Name c. Data Name
b. Range Name d. Cell Name
ANS: A PTS: 1 REF: 393 TOP: Critical Thinking
72. Phil also assumes that the actual taxes owed will be rounded to the nearest dollar. Using this
information, he enters the formula ____ in cell C18 to calculate the taxes. This is the area indicated by
#1 in the figure above.
a. =ROUND(Taxrate*C16,0) c. =-ROUND(Taxrate*C16,1)
b. =-ROUND(Taxrate*C16,0) d. =-ROUND(Taxrate*C16,2)
ANS: B PTS: 1 REF: 396 TOP: Critical Thinking
73. Phil also calculates the projected income after taxes in cell C19 using the formula ____.
a. =C18+C19 c. =C18+C16
b. =C18-C12 d. =C18-C16
ANS: C PTS: 1 REF: 396 TOP: Critical Thinking
74. Phil now must add back the depreciation because this is not actually a cash flow. Cell C15 contains the
depreciable amount represented as a negative value. In this case, Phil enters the formula ____ in cell
C21 and copies it across the row.
a. =-C15 c. =C15-C16
b. =C15 d. =C15+C16
ANS: A PTS: 1 REF: 397 TOP: Critical Thinking
75. To determine the projected cash flow, Phil must now total the following: taxable income, depreciation
added back to the cash flow, and principal payments deducted from the cash flow (already a negative
value). Phil enters the following formula in cell C24 and copies it across the row: ____.
a. =SUM(C19,C21,C22) c. =C19+C21-C22
b. =C19-C21+C22 d. =C19-C21-C22
ANS: A PTS: 1 REF: 397 TOP: Critical Thinking
Natalie is working on calculating the IRR of a project. Please refer to the figure above as you answer
the questions below.
76. In college, Natalie had to calculate IRR manually so that she would have a good understanding of the
way it worked. To do that, she needed to guess an IRR value and substitute it as the ____ in the NPV
formula.
a. discount rate c. time period
b. amount borrowed d. none of the above
ANS: A PTS: 1 REF: 407 TOP: Critical Thinking
77. Natalie knows the syntax of the IRR function is as follows: IRR(values,[guess]). The values argument
is a list of positive and negative cash flows. For this function to work, ____.
a. all cash flows must be positive
b. all cash flows must be negative
c. there must be at least one positive and one negative cash flow
d. it doesn’t matter at all
ANS: C PTS: 1 REF: 370 TOP: Critical Thinking
78. Natalie’s company has been going through a rocky time. Her boss asks her what would be an
acceptable cash flow interval for calculating IRR. What should be her answer?
a. every month c. every time a bill is paid
b. every time a payment is received d. all of the above
ANS: A PTS: 1 REF: 407 | 408 TOP: Critical Thinking
79. Natalie has used the IRR function in the past and received a #NUM error. What does this error mean?
a. 20 iterations did not result in an accurate value.
b. 10 iterations did not result in an accurate value.
c. There is an error in Natalie’s data.
d. There is an error in Natalie’s formulas.
ANS: A PTS: 1 REF: 408 TOP: Critical Thinking
80. Applying the IRR function to the worksheet in cell B39, Natalie writes the formula ____.
a. =IRR(B24:G24) c. =IRR(C30:C38)
b. =IRR(B27:G27) d. =IRR(C39)
ANS: B PTS: 1 REF: 408 TOP: Critical Thinking
COMPLETION
1. Interest that is paid solely on the amount of the original principal value is called
____________________ interest.
ANS: simple
2. The PMT function finds the value of the payment per period, assuming that there are constant
payments and a constant ____________________ for the duration of the loan.
ANS: negative
4. Payments that are inflows should be ____________________, and payments that are outflows should
be negative.
ANS: positive
5. Before constructing a formula with a financial function, it is a good idea to determine the timeline of
the financial ____________________.
ANS: transaction
PTS: 1 REF: 371
ANS: type
7. A(n) ____________________ payment is money required from the borrower toward the purchase of
an asset.
ANS: down
8. In the SLN function, the ____________________ argument is the value at the end of the depreciation,
sometimes referred to as the salvage value.
ANS: salvage
9. Sometimes a value is needed in multiple worksheets within a workbook. In this case, a(n)
____________________ range name is best.
ANS: global
ANS: names
ANS:
month
[month]
ANS: ROUND
13. When using the NPV function, the hurdle rate must match the ____________________ duration, so
that a yearly cash flow would apply to a yearly discount rate, for example.
ANS:
period
time period
14. The NPV function in Excel takes the cash flow from year 0, which is referred to as value 1, and
discounts the value by ____________________.
ANS:
one year
1 year
12 months
15. The ____________________ method calculates the rate at which discounted cash flows in and out are
equal, essentially where the NPV is $0.
ANS:
IRR
irr
Internal Rate of Return
internal rate of return
ANS:
guess
[guess]
17. The ____________________ argument is a list of positive and negative cash flows.
ANS: values
18. The ____________________ is the sum of the cash flows, excluding the initial investment, divided by
the investment value.
ANS:
ROI
roi
return on investment
ROI (return on investment)
return on investment (ROI)
ANS: money
20. Excel provides a method to automatically calculate the payback period, but it is a somewhat complex
process that involves using the ____________________ reference function and calculating a
cumulative total.
ANS: MATCH
MATCHING
Identify the letter of the choice that best matches the word or phrase.
a. simple interest d. compound interest
b. principal e. balloon payment
c. interest f. cash flow
1. The value of the loan or investment
2. Interest that is paid solely on the amount of the original principal value
3. A user fee you are paying to “use” the bank’s money
4. Adding interest earned each period to the principal for purposes of computing interest for the next
period
5. Additional money owed at the end of a loan
6. Cash amounts paid or received
Identify the letter of the choice that best matches the arguments in the CUMIPMT function.
a. #1 d. #4
b. #2 e. #5
c. #3 f. #6
7. Type
8. Rate per period
9. Initial loan amount (pv)
10. Number of periods (nper)
11. Starting period
12. Ending period
ESSAY
1. What is the correct syntax of the PMT function? Briefly describe each of the arguments associated
with this function.
ANS:
Correct syntax: =PMT(rate,nper,pv,[fv],[type])
• The rate argument is the interest rate per compounding period.
• The nper argument is the number of compounding periods.
• The pv argument is the present value, also referred to as the original principal value at the beginning
of the financial transaction.
• The fv argument is the future value (compounded amount), also referred to as the value at the end of
the financial transaction.
• The type argument designates when payments are made. Type 0, the default type, indicates that
payments are made at the end of the period. Type 1 indicates that payments are made at the beginning
of the period.
2. Correctly set up an NPER function, assuming you are solving for how many years it will take to pay
off a loan. You do not have to do the calculations—just set up the formula based on the facts below:
• NPER(rate,pmt,pv,fv,type)
• The rate per year is 3.5% compounded quarterly.
• The payment (pmt) is –$25,000 per quarter.
• The present value (pv) is $400,000 because the bank has offered to fund all of the capital required for
the project.
• The future value (fv) is assumed to be $0 because no mention is made of any residual amounts owed
at the end of the loan.
• The type argument is assumed to be the default 0.
ANS:
=NPER(3.5%/4,-25000,400000)/4
NPER function result: 4.328051 (years)
Notes:
Since the payments are quarterly, the interest rate is divided by 4.
Since the type argument is 0, it can be omitted.
Remember to calculate NPER in terms of the number of compounding periods; in this case, the
number of quarters. To calculate the loan duration in years, divide the number of periods (NPER) by
the number of quarters per year.
PTS: 1 REF: 374 TOP: Critical Thinking
3. Briefly describe each of the following depreciation methods: straight line depreciation,
double-declining balance, sum of the years digits, and fixed-declining balance.
ANS:
• Straight line depreciation basically allocates the value of an asset evenly throughout the life of the
asset.
• Double-declining balance computes depreciation at an accelerated rate. Depreciation is highest in the
first period and decreases in successive periods.
• In sum of the years digits, depreciation is apportioned based on a declining fractional amount of the
asset’s life.
• Fixed-declining balance returns the depreciation of an asset for a specified period.