Business Analytics w Excel and AI (Homeworks 1 -3)

What is Annual Percentage Rate (APR)?

What does Annual Percentage Rate tell us?

What is Effective Annual Rate (EAR)?

What does Effective Annual Rate (EAR) tell us?

What does the IRR function tell us and what are its components?

The IRR (Internal Rate of Return) function in Excel calculates the annualized rate of return on an investment based on a series of cash flows, assuming those cash flows occur annually.

Essentially, IRR tells you what rate of return makes the Net Present Value (NPV) of an investment equal to zero.

Key takeaway: =IRR() finds the rate of return at which the present value of your investment's future cash flows equals its initial cost, resulting in an NPV of zero.

What does the =RATE function tell us and what are its components?

A financial function that calculates the interest rate per period for a loan or investment, assuming fixed periodic payments and a constant interest rate.

What does Nper mean in the RATE function?

NPER (Number of Periods)

The total number of payment periods over the life of a loan or investment.

PMT (Payment)

The fixed amount of money paid or received each period.

PV (Present Value)

The current value of a loan or investment, measured in today's dollars

FV (Future Value)

The value of a loan or investment at the end of the specified number of periods.

TYPE (Payment Timing)

Specifies whether payments occur at the beginning (1) or end (0) of each period.

Values in IRR function

A range of cells containing the investment's cash inflows and outflows over time

Guess in IRR function

An optional estimate of the IRR that Excel uses as a starting point. Defaults to 10%.

Net Present Value (NPV)

Net present value (NPV) is the sum of the present values of all of an investment’s cash flows, (inflows and outflows), each discounted back to today at the required rate of return.

Required Rate of Return