09. Excel NPV and Goalseek. Discounted Cashflow modelling The key to estimating the value of an asset is to convert future cashflows to present value.

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Presentation transcript:

09. Excel NPV and Goalseek

Discounted Cashflow modelling The key to estimating the value of an asset is to convert future cashflows to present value Can be used to value bonds, stocks or entire companies in IPOs or Mergers Future cashflows are discounted to present values at a certain interest rate The Net Present Value of the future cashflows is the fair value of that asset

Input the following projected cash flows and interest rate

Select cell D13

Click Formulas -> Financial -> NPV

For Rate select cell containing Interest Rate

For Value1 choose select the cashflows in table

Click OK

Calculates Net Present Value

Goal Seek

Calculating Yield Sometimes we want to find what interest rate we would earn by investing e.g. finding the yield to maturity of a bond The cashflows are the coupon payments from the bond The present value is the price we could buy the bond for in the market What interest rate would we earn from buying the bond, and waiting for the coupon payments?

Calculate the yield if the price of bond is £420 and the coupon payments are £100 per year

Click Data -> What-If Analysis -> Goal Seek

Set cell D13 to value 420 By changing cell D11

Click OK

Finds that the interest rate would be which means 6.1%

Click OK

If statements

If statements allow you to evaluate a cell and draw a conclusion

An investor may only be willing to buy an asset which provided an NPV of £450

Change the initial interest rate to 4% (0.04)

You want to make the conclusion obvious in cell D15

Click Formulas -> Logical -> IF

In Logical_test write the condition which must be true or false i.e. D13>450

If True then show Yes If False then show No

Click OK

In the current example the investor will not invest as the NPV is less than £450

Change the interest rate to 2% (0.02)

The conclusion has now changed, to say that the investor should invest

Table formatting

You can format cells to make them look more presentable

Select your table, right-click, then choose Format Cells

Choose Border

Select double line border

Choose Top and Bottom borders

Click OK

Interest Rate is currently displayed as a decimal

Right-click on the cell, then select Format Cells

Choose Number -> Percentage

Click OK

Interest Rate now expressed as a percentage

File -> Save As -> 09b-datacompleted.xlsx

Challenge Use Goal Seek to find the interest rate which would give an NPV of £480 Produce an If statement to say Yes when the interest rate is above 4%, and No when it is less than 4%