Tutor profile: Patrick L.

What's the basic difference between a Roth IRA and a Traditional IRA?

Both Roth and Traditional IRA's are tools individuals use to save for retirement, which makes sense since IRA stands for "Individual Retirement Account". The difference is that in a Roth IRA you contribute post-tax dollars you've gained through earned wages. When making qualified distributions from a Roth IRA, an individual will be able to take the basis and gains out tax-free. Conversely, in a Traditional IRA, contributions are made with pre-tax dollars earned dollars, so when qualified distributions are taken, both the basis and gains are taxed.

How can I use the net present value and internal rate of return to evaluate a project?

The net present value of a project is the present value of the future values discounted back to today's dollars using a specific interest rate, often referred to as the discount rate. When analyzing the net present value, you break even with the project when it equals zero. If the number gets larger, that means it is a better project (all other factors equal). Similarly, the internal rate of return determines the rate of return a project. In order to analyze this, one must compare it again the required rate of return. If it is larger than the required rate of return, it is a good project (all other factors equal).

What are the three financial statements, and what do they do?

The three financial statements are the balance sheet, income statement, and the statement of cash flows. The balance sheet is a snapshot of assets, liabilities, and equity at a certain point in time. The income statement presents your income and expenses over a period of time. Lastly, the statement of cash flows analyzes the movement of cash in terms of various activities including investing, financing, and operating.