Excel Tutorial 9 Developing a Financial Analysis

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 New Perspectives on Microsoft Office Excel 2007

Objectives Determine a payback period Calculate a net present value Calculate an internal rate of return Trace a formula error to its source New Perspectives on Microsoft Office Excel 2007

Working with Loans and Investments To calculate the present value of a loan or investment, use the PV function To calculate the future value of a loan or an investment, use the FV function To calculate the size of the monthly or quarterly payments required to pay off a loan or meet an investment goal, use the PMT function To calculate the number of monthly or quarterly payments required to pay off a loan or meet an investment goal, use the NPER function To calculate the interest of a loan or investment, use the RATE function New Perspectives on Microsoft Office Excel 2007

Working with Loans and Investments =PMT(rate, nper, pv, [fv=0] [type=0]) =FV(rate, nper, pmt, [pv=0] [type=0]) =NPER(rate, pmt, pv, [fv=0] [type=0]) =PV(rate, nper, pmt, [fv=0] [type=0]) =RATE(nper, pmt, pv, [fv=0] [type=0]) New Perspectives on Microsoft Office Excel 2007

Calculating a Loan Payment The functions to work with loans are the same ones you used to work with investments New Perspectives on Microsoft Office Excel 2007

Creating an Amortization Schedule To calculate the amount of interest due in a specified payment period from a loan, use the IPMT function To calculate the amount of a loan payment used to pay off the principal of the loan, use the PPMT function =IPMT(rate, per, nper, pv, [fv=0] [,type=0]) =PPMT(rate, per, nper, pv, [fv=0] [,type=0]) New Perspectives on Microsoft Office Excel 2007

Creating an Amortization Schedule New Perspectives on Microsoft Office Excel 2007

Calculating Yearly Interest and Principal Payments One way of calculating totals from several payment periods is to use the Analysis Tool-Pak add-in =CUMIPMT(rate, nper, pv, start, end, type) =CUMPRINC(rate, nper, pv, start, end, type) New Perspectives on Microsoft Office Excel 2007

Calculating Yearly Interest and Principal Payments New Perspectives on Microsoft Office Excel 2007

Projecting Future Income and Expenses An income statement, also known as a profit and loss statement, shows how much money a business makes or loses over a specified period of time New Perspectives on Microsoft Office Excel 2007

Interpolating a Series of Values Select the range with the first cell containing the starting value, blank cells for middle values, and the last cell containing the ending value In the Editing group on the Home tab, click the Fill button, and then click Series Specify whether the series is organized in rows or columns and the type of series to interpolate. Check the Trend check box Click the OK button to insert the interpolated series into the middle cells New Perspectives on Microsoft Office Excel 2007

Extrapolating a Series of Values Select a range with the first cell containing the starting value followed by blank cells to store the extrapolated values In the Editing group on the Home tab, click the Fill button, and then click Series Select whether the series is organized in rows or columns. Select the type of series to extrapolate into the blank cells. Enter the step value in the Step value box Click the OK button to insert the extrapolated series into the blank cells New Perspectives on Microsoft Office Excel 2007

Extrapolating a Series of Values New Perspectives on Microsoft Office Excel 2007

Calculating Depreciation To calculate a straight-line depreciation, use the SLN function To calculate a declining balance depreciation, use the DB function To calculate a sum-of-years’ digit depreciation, use the SYD function To calculate a double-declining balance depreciation, use the DDB function To calculate a variable depreciation, use the VBD function New Perspectives on Microsoft Office Excel 2007

Calculating Depreciation New Perspectives on Microsoft Office Excel 2007

Working with Payback Period One simple measure of the return from an investment is the payback period, which is the length of time required for an investment to recover its initial cost New Perspectives on Microsoft Office Excel 2007

Calculating Net Present Value The time value of money is based on the assumption that money received today is worth more than the same amount received later New Perspectives on Microsoft Office Excel 2007

Determining the Return from an Investment To calculate the net present value when the initial investment is made immediately, use the NPV function with the discount rate and the series of cash returns from the investment. Subtract the cost of the initial investment from the value returned by the NPV function To calculate the net present value when the initial investment is made at the end of the first payment period, use the NPV function with the discount rate and the series of cash returns from the investment. Include the initial cost of the investment as the first value in the series To calculate the internal rate of return, use the IRR function with the cost of the initial investment as the first cash flow value in the series. For investments in which there are several positive and negative cash flow values, include a guess to aid Excel in arriving at a reasonable internal rate of return value New Perspectives on Microsoft Office Excel 2007

Using the NPV Function =NPV(rate, value1 [value2, value3, ...]) New Perspectives on Microsoft Office Excel 2007

Using the NPV Function New Perspectives on Microsoft Office Excel 2007

Calculating the Internal Rate of Return The point at which the net present value of an investment equals 0 is the internal rate of return (IRR) =IRR(values, [guess=0.1]) New Perspectives on Microsoft Office Excel 2007

Calculating the Internal Rate of Return New Perspectives on Microsoft Office Excel 2007

Exploring other Financial Functions For cash flows that appear at unevenly spaced intervals, you use the XNPV and XIRR functions =XNPV(rate, values, dates) =XIRR(values, dates, [guess = 0.1]) New Perspectives on Microsoft Office Excel 2007

Tracing Error Values Select the cell containing an error value In the Formula Auditing group on the Formulas tab, click the Error Checking button arrow and then click Trace Error Follow the tracer arrows to a precedent cell containing an error value If the tracer arrow is connected to a worksheet icon, double-click the tracer arrow and open the cell references in the worksheet Continue to trace the error value to succeeding precedent cells. When you locate a cell containing an error value that has no precedent cells with errors, you have located the source of the error New Perspectives on Microsoft Office Excel 2007

Tracing Error Values New Perspectives on Microsoft Office Excel 2007