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

XP New Perspectives on Microsoft Excel 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 2

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

XP New Perspectives on Microsoft Excel Visual Overview

XP New Perspectives on Microsoft Excel Loan and Investment Functions

XP New Perspectives on Microsoft Excel Excel Financial Functions Can be used with either investments or loans Difference is based on direction of cash flow

XP New Perspectives on Microsoft Excel Evaluating Investment Options FunctionUse to calculate… PVPresent value of a loan or an investment FVFuture value of a loan or an investment PMTSize of payment in each period required to pay off a loan or meet an investment goal NPERNumber of payments required to pay off a loan or meet an investment goal RATEInterest on a loan or an investment

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel Calculating a Periodic Payment with the PMT Function Financial functions automatically format calculated values as currency Negative cash flows appear in red within parentheses

XP New Perspectives on Microsoft Excel Calculating a Future Value with the FV Function

XP New Perspectives on Microsoft Excel Calculating an Investment’s Length with the NPER Function Returns the number of payment periods, not necessarily the number of years

XP New Perspectives on Microsoft Excel Calculating an Investment’s Present Value with the PV Function

XP New Perspectives on Microsoft Excel Calculating an Investment’s Interest Rate with the RATE Function Value returned is the interest rate per period, not the interest rate per year

XP New Perspectives on Microsoft Excel Working with Loans and Mortgages Use PMT function to calculate a quarterly loan payment

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel Creating an Amortization Schedule Initial payment in the amortization schedule

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel Calculating Cumulative Interest and Principal Payments

XP New Perspectives on Microsoft Excel Visual Overview

XP New Perspectives on Microsoft Excel Income Statement and Depreciation

XP New Perspectives on Microsoft Excel Projecting Future Income and Expenses Income Statement worksheet

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel Projecting Future Expenses Gross profit – Difference between sales revenue and cost of goods sold

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel Depreciation Functions

XP New Perspectives on Microsoft Excel FunctionUse to calculate… SLN functionStraight-line depreciation DB functionDeclining balance depreciation SYD functionSum-of-years’ digit depreciation DDB functionDouble-declining balance depreciation VBD functionVariable depreciation Calculating Depreciation

XP New Perspectives on Microsoft Excel Straight-Line Depreciation Asset depreciates by equal amounts each year of its lifetime until it reaches the salvage value

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel Declining Balance Depreciation Asset depreciates more quickly initially under declining balance model than straight-line model

XP New Perspectives on Microsoft Excel Completing the Income Statement Final income statement projections

XP New Perspectives on Microsoft Excel Visual Overview

XP New Perspectives on Microsoft Excel NPV, IRR, and Auditing

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel 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 usually preferred to those with lower IRRs

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel Tracing an Error Error values traced across the worksheet

XP New Perspectives on Microsoft Excel Tracing an Error Source of the error value

XP New Perspectives on Microsoft Excel 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

XP New Perspectives on Microsoft Excel 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