Microsoft Office Excel 2010 ® ® Tutorial 9: Working with Financial Tools and Functions.

Microsoft Office Excel 2010® ®

Tutorial 9:Working with Financial Tools

and Functions

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New Perspectives on Microsoft Excel 2010 222

Objectives• Work with financial functions to analyze loans

and investments• Create an amortization schedule• Calculate a conditional sum• Interpolate and extrapolate a series of values• Calculate a depreciation schedule

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Objectives• Determine a payback period• Calculate a net present value• Calculate an internal rate of return• Trace a formula error to its source

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Visual Overview

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Loan and Investment Functions

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Excel Financial Functions• Can be used with either investments or loans• Difference is based on direction of cash flow

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Evaluating Investment Options

Function Use to calculate…

PV Present value of a loan or an investment

FV Future value of a loan or an investment

PMT Size of payment in each period required to pay off a loan or meet an investment goal

NPER Number of payments required to pay off a loan or meet an investment goal

RATE Interest on a loan or an investment

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Calculating a Periodic Payment with the PMT Function

• Optional type argument specifies whether payments are made at end (type=0) or beginning (type=1) of each period–Default is type=0

• Interest rate and payment period must use same time unit

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Calculating a Periodic Payment with the PMT Function• Financial functions automatically format

calculated values as currency• Negative cash flows appear in red within

parentheses

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Calculating a Future Value with the FV Function

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Calculating an Investment’s Length with the NPER Function

• Returns the number of payment periods, not necessarily the number of years

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Calculating an Investment’s Present Value with the PV Function

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Calculating an Investment’s Interest Rate with the RATE Function

• Value returned is the interest rate per period, not the interest rate per year

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Working with Loans and Mortgages

• Use PMT function to calculate a quarterly loan payment

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Creating an Amortization Schedule• Amortization schedule specifies how much of

each loan payment is devoted toward interest and toward repaying the principal

• Principal is the amount of the loan that is still unpaid

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Creating an Amortization Schedule• To calculate the amount of a loan payment

devoted to interest and to principal– IPMT function returns the amount of a payment

that is used to pay the interest on the loan

– PPMT function calculates the amount used to repay the principal

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Creating an Amortization Schedule• Initial payment in the amortization schedule

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Creating an Amortization Schedule• Total amount paid each month doesn’t

change, only how that amount is allocated between paying interest and paying off principal

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Calculating Cumulative Interest and Principal Payments• To calculate cumulative payments on interest

and principal– CUMIPMT function calculates the sum of several

interest payments

– CUMPRINC function calculates the cumulative total of payments made toward the principal

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Calculating Cumulative Interest and Principal Payments

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Visual Overview

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Income Statement and Depreciation

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Projecting Future Income and Expenses• Income Statement worksheet

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Exploring Linear and Growth Trends

• Linear trend– Values change by a constant amount– Appears as a straight line

• Growth trend– Values change by a

constant percentage– Appears as a curve;

greatest increases occur near end of series

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Interpolating within a Series of Values

• If you know beginning and ending values in a series and whether they constitute a linear or growth trend, AutoFill can fill in missing values

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Projecting Future Expenses• Gross profit – Difference between sales revenue and cost of

goods sold

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Extrapolating from a Series of Values

• Use extrapolation to extend a series from one or more beginning values– Step value represents the amount that each

value is increased or multiplied as the series is extended

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Calculating Depreciation of Assets• Depreciation– Process of allocating original cost of an investment

over the years of use• What you need to know to calculate the depreciation

of a tangible asset:– Asset’s original cost– Asset’s useful life– Salvage value (value at the end of its useful life)– Rate at which the asset is depreciated over time

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Depreciation Functions

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Function Use to calculate…

SLN function Straight-line depreciation

DB function Declining balance depreciation

SYD function Sum-of-years’ digit depreciation

DDB function Double-declining balance depreciation

VBD function Variable depreciation

Calculating Depreciation

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Straight-Line Depreciation• Asset depreciates by equal amounts each year

of its lifetime until it reaches the salvage value

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Declining Balance Depreciation• Asset depreciates by a constant percentage

each year–Depreciation value is highest early in its

lifetime; also when highest declines occur–As asset loses value, depreciation amounts

steadily decrease, though the percentage decrease remains the same

• An example of a negative growth trend

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Declining Balance Depreciation• Asset depreciates more quickly initially under

declining balance model than straight-line model

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Completing the Income Statement• Final income statement projections

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Visual Overview

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NPV, IRR , and Auditing

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Calculating the Payback Period of an Investment• Payback period– Length of time required for an investment to

recover its initial cost– Quickly projects the value of an investment– Does not take into account the time value of

money

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Calculating Net Present Value• Time value of money–Money received today is worth more than

same amount received later (invest and earn interest)

• Rate of return (or discount rate)– Interest rate applied to present funds–Defines time value of money by measuring

future dollars in terms of current dollars

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Calculating Net Present Value• Use PV (present value) function to calculate

time value of money under different rates of return–Returns a negative value

• Use NPV (net present value) function to determine what would constitute a fair exchange if future payments are not equal–Returns a positive value

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Choosing a Rate of Return• Related to concept of risk—possibility that

entire transaction will fail, resulting in loss of initial investment

• Investments with higher risks generally have higher rates of return

• At higher rates of return, net present value of investment goes down

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Calculating the Internal Rate of Return

• Internal rate of return (IRR)– Point at which net present value of an investment

equals 0– Forms a basis of comparison between two

investments• Investments with

higher IRRs are usuallypreferred to those with lower IRRs

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Calculating the Internal Rate of Return • Use IRR function to calculate internal rate of

return for an investment– Like NPV function, it assumes that payments

and payoffs occur at evenly spaced intervals–Unlike NPV function, include initial cost of

the investment in the values list• Use XNPV and XIRR functions for cash flows

that appear at unevenly spaced intervals

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Auditing a Workbook• Errors will spread throughout a workbook

from a precedent cell down through all of its descendents

• Use Excel auditing tools to trace an error back to its source

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Tracing an Error• Error code– Begins with # followed by error name, which

indicates type of error– Does not specify where mistake is located

• Error indicator (green triangle in upper-left corner of cell)– Flags cells with an error or potential error

• Tracer arrows– Provide visual clue to relationship between two

cells; point from precedent cell to dependent cell

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Tracing an Error• Error values traced across the worksheet

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Tracing an Error• Source of the error value

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Evaluating a Formula• Use Evaluate Formula dialog box to display

value of different parts of the formula or “drill down” through cell references in the formula to discover the source of formula’s value

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Using the Watch Window• Watch Window– Dialog box that displays values of cells located

throughout the workbook– Allows user to view impact of changing a cell’s

value on widely scattered dependent cells

Microsoft Office Excel 2010 ® ® Tutorial 9: Working with Financial Tools and Functions.

Documents

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