Principles of Finance with Excel, 2 nd edition Instructor materials Chapter 26 Excel functions

Excel functions in PFE  Financial functions Financial functions  Math functions Math functions  Conditional functions Conditional functions  Text functions Text functions  Statistical functions Statistical functions  Match and Index MatchIndex 2 Click on link to go to relevant section of this Powerpoint

Financial functions  NPV  IRR  FV  PV  PMT  Rate  NPER 3

NPV  This Excel function computes the PRESENT VALUE (not the net present value!) of a series of cash flows 4

To compute the true Net Present Value 5

IRR  Computes the internal rate of return 6

Two IRRs  Can happen when there are two changes of sign in the cash flows (see PFE, Chapter ???)  Procedure  First graph the net present value  Establish approximate values of the two IRRs  Then use the “guess” option on the IRR function to determine the actual IRRs 7

8 The NPV graph shows one IRR between 0%-5% and another around 35%. See next slide for exact computation using IRR.

Determining the two IRRs 9 The IRR syntax: =IRR(cashflow, guess) “guess” allows you to indicate the approximate location of the IRR. If “guess” = 0, IRR will find the first IRR. This is fine if there is only one IRR.

FV  Computes the future value of a series of cash flows  A switch allows you to indicate whether the cash flows occur at the beginning or the end of the period 10

FV example 11 You deposit 1,000 in bank at end of each of the next 10 years. Interest rate is 5%. How much will you have at the end of 10 years?

FV dialog box for previous example 12

FV example with beginning- of-period deposits 13 You deposit 1,000 in bank at beginning of each of the next 10 years. Interest rate is 5%. How much will you have at the end of 10 years?

Dialog box for previous 14

PV  Computes the present value of a series of constant cash flows 15

Dialog box for PV 16 Note:  Pmt is entered as negative number to get positive PV  Type can be adjusted for beginning or end-of- period cash flow. End-period is default.

PMT  Computes the constant payment needed to pay off a loan over time  Example: What annual payment will pay off a $10,000 loan over 5 years at 15%? 17

PMT computation 18 We’ve put negative principal (-B2) into the PMT function. Otherwise it gives a negative answer. See book (Chapter 2) for more discussion.

Loan table  You can also check the PMT computation by creating a loan table— this shows the periodic breakdown of the payment between principal and interest. 19

Creating a loan table 20

IPMT, PPMT  Compute the interest (IPMT) and the principal (PPMT) of a loan table 21

Rate  Computes IRR of series of constant payments 22

Checking the Rate computation with IRR 23

Math functions  Exp  Ln  Round, RoundDown, RoundUp, Trunc  Sqrt  Sum  SumIf  SumProduct 24

Exp and Ln  As explained in Chapter 3, these two functions are used to compute the future value (Exp) and the rate of return (Ln) when interest is continuously compounded  Hard to understand this without referring to Chapter 3! 25

Use Exp to compute present and future values for continuous compounding 26

Use Ln to compute continuously- compounded rates of return 27

Round, RoundDown, RoundUp, Trunc  Various ways of rounding numbers 28

SumIf  Sums numbers depending on a condition 29

SumProduct  Multiplies parallel columns or rows of numbers 30

Conditional functions  Three amazing functions  If  VLookup  HLookup 31

If  Let’s you choose function outcome dependent on a condition  Syntax: If(condition,answer if condition is true, answer if condition is false) 32

If example  Example: The widget price at ABC Corp. depends on the quantity ordered. If you order 25, the price = $2. 33

Use cell reference in If 34

Nested IFs 35 You can put IFs one inside the other. In the above example we compute the final letter grade in a course based on the exam grade. Notice the use of text in the function (put text answers inside “ “ )

VLookup  Enables lookups in tables  U.S. tax brackets 36

Use VLookup 37 VLookup rules  Left-hand column must be in increasing order  Syntax: VLookup(number, table,column for answer)

Nested IFs or VLookup? 38 If you have a lot of conditions, VLookup is better than nested IFs

Homework problem  Design a spreadsheet that gives the total taxes payable by a single taxpayer.  Have to take into account both the marginal tax rate and the taxes on whole brackets. 39

HLookup  Like VLookup, but with choice in top row  Question: What happens with fractional entries in B2? 40

Class problem  Design spreadsheet so that only entries 1-5 are permitted  Hint: Consider using Excel function Mod 41

Exercise  Design tax table lookup for either Single or Married 42

Text functions: “Adding” text together  To add two cells where at least one contains text, use ampersand “&”  To create text and add it, write text in double quotations “ “ 43

The TEXT function  Formats numbers as text with certain properties  Example: We use variations of Text(B2,”0.0%”), Text(B2,”0.000%”), Text(B2,”0%”) to format the number in B2 44

More examples of Text  A date in Excel is a decimal number. Use Now() and various formatting options to explain this to yourself.  A decimal number can be converted by Text to various formats, including dates  See next slide 45

Use of Now() 46

Examples 47

Statistical functions  Average  Var, VarP  Stdev, StevP  Frequency  Covar  Max, Min  Count, CountA 48

Some statistical functions 49

Why is this the variance? 50

Var, VarP  VarP is the population variance: For n data points and Var is the sample variance: 51

StdevP and Stdev  StdevP and Stdev are the standard deviations: 52

Max, Min, Median, Large, Rank 53 Median: The grade in the middle (half above, half below) Large(Range,3): The 3 rd largest grade in the Range There is also Small( ) Rank(B9,Range): What’s the rank of cell B9 in the Range

Frequency  Counts number of data points in ranges (called “bins”)  This is an array function: When you finish entering it, you have to hit Ctrl+Shift+Enter [not just Enter] 54

Basic frequency example 55

Play with the example 56 We changed the bins. What does the “3” next to 50 mean? Answer: # grades <= 50 Try raising the 50 grade to 5 1

Covariance, Correlation  Measure the co-movement of two sets of data.  Answers question: What’s the relation between the data sets  Excel function: Covar, Correl 57

Definitions 58

Covariance example 59

Proving the results 60

Linear regression 61

Linear regression  Tests the relationship between the two data series  In our case:  What’s the best line describing  a = , b =  What percentage of the variability of the stats grade can be ascribed to the variability of the Excel grade?  R 2 = 57.25% 62

Regression in an Excel chart  Graph data on X,Y (Scatter) chart, with only points (no lines)  Click on data points  Right-click and go to Add Trendline 63

Chart data clicked, Right mouse click 64

Trendline dialog box 65

Regression using functions  Excel has three regression functions  Intercept(y-data,x-data)  Slope(y-data,x-data)  Rsq(y-data,x-data) 66

Index  Use Index to locate a number in an array. 67

Match (more advanced)  Use Match to locate a specific value in an array.  In the next example, we use mathc to find when Citicorp had its maximum and minimum price over a given period. 68

69