Financial Management

Assignment 01

Instructor - Abreham Amanuel (PhD)

There are 5 discussion questions and attempt them all.

1. What is simple interest? What is compound interest and its importance?

2. What is an annuity? Is an annuity worth more or less than a lump sum payment received
now that would equal the sum of all the future annuity payments.

3. The payback period method has been criticized for not taking the time value of money into
account. Could this limitation be overcome? If so, would this method then be preferable to
the NPV method?

4. Research indicates that the IRR method is extremely popular even though it has
shortcomings when compared to the NPV method. Why might managers prefer to use IRR
rather than NPV when carrying out discounted cash flow evaluations?

5. How might excessively high levels of borrowing adversely affect the ability of managers to
run the business?