A point estimator (PE) is a sample statistic used to estimate an unknown population parameter. It is a random variable and therefore varies from sample to sample. A good example of an estimator is the sample mean x, which helps…

Point Estimate A point estimate gives statisticians a single value as the estimate of a given population parameter. For example, the sample mean X̄ is the point estimate of the population mean μ. Similarly, the sample proportion p is a…

The student’s T-distribution is a bell-shaped probability distribution symmetrical about its mean. It is considered the best distribution to use for the construction of confidence intervals when:

Confidence interval (CI) refers to a range of values within which statisticians believe the actual value of a certain population parameter lies. It differs from a point estimate which is a single, specific numerical value.

A timeline is a physical illustration of the amounts and timing of cash flows associated with an investment project. Cash flows that are regular and of equal amounts can be modeled as annuities. In such exam problems, all you have…

The internal rate of return is the discount rate that sets the present value of all cash inflows of a project equal to the present value of all cash outflows of the same project. In other words, it is the…

The Net present value (NPV) of a project refers to the present value of all cash inflows minus the present value of all cash outflows, evaluated at a given discount rate. The difference between the two represents the income generated…

The effective annual rate of interest (EAR) refers to the rate of return earned by an investor in a year, taking the effects of compounding into account. Remember, compounding is the process by which invested funds grow exponentially as a…

Future Values The Future Value (FV) of a Single Sum of Cash Flow The Future Value (FV) of a single sum of money is the future amount of money invested today at a given interest rate (r) for a specified…