1. 09. Excel NPV and Goalseek

2. 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

3. Input the following projected cash flows and interest rate

4. Select cell D13

5. Click Formulas -> Financial -> NPV

6. For Rate select cell containing Interest Rate

7. For Value1 choose select the cashflows in table

8. Click OK

9. Calculates Net Present Value

10. Goal Seek

11. 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?

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

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

14. Set cell D13 to value 420 By changing cell D11

15. Click OK

16. Finds that the interest rate would be 0.061 which means 6.1%

17. Click OK

18. If statements

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

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

21. Change the initial interest rate to 4% (0.04)

22. You want to make the conclusion obvious in cell D15

23. Click Formulas -> Logical -> IF

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

25. If True then show Yes If False then show No

26. Click OK

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

28. Change the interest rate to 2% (0.02)

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

30. Table formatting

31. You can format cells to make them look more presentable

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

33. Choose Border

34. Select double line border

35. Choose Top and Bottom borders

36. Click OK

37. Interest Rate is currently displayed as a decimal

38. Right-click on the cell, then select Format Cells

39. Choose Number -> Percentage

40. Click OK

41. Interest Rate now expressed as a percentage

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

43. 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%