Financial Functions HNDA 1 st Year Computer Applications. By Nadeeshani Aththanagoda. Bsc,Msc ATI-Section Anuradhapura

Transcription

1 Financial Functions HNDA 1 st Year Computer Applications By Nadeeshani Aththanagoda. Bsc,Msc ATI-Section Anuradhapura

2 Financial Functions This section will cover the built-in Excel Financial Functions. These functions perform many of the common financial calculations, such as the calculation of yield, interest rates, duration, valuation and asset depreciation.

3 Financial Functions Investment Value Functions FV NPV PV Payment Functions PMT Interest Rate Functions RATE Internal Rate of Return Functions IRR

4 Future Value(FV) function Calculates the future value of an investment with periodic constant payments and a constant interest rate Syntax-FV(rate, nper, pmt, pv, type)

5 Future Value(FV) function cont. rate - The interest rate, per period. nper - The number of periods for the lifetime of the annuity. [pmt] - An optional argument that specifies the payment per period. (Note that if the [pmt] argument is omitted, the [pv] argument must be supplied). [pv] - An optional argument that specifies the present value of the annuity - i.e. the amount that a series of future payments is worth now. (If the [pv] argument is omitted, it takes on the default value 0. Also, if [pv] is omitted, the [pmt] argument must be supplied). [type] - An optional argument that defines whether the payment is made at the start or the end of the period. The [type] argument can have the value 0 or 1, meaning: 0 - the payment is made at the end of the period; 1 - the payment is made at the start of the period. If the [type] argument is omitted, it takes on the default value of 0 (denoting payments made at the end of the period).

6 Example 1 Excel FV Function Examples In the following spreadsheet, the Excel Fv function is used to calculate the future value of an investment of $1,000 per month for a period of 5 years. The present value is 0, the interest rate is 5% per year and the payments are made at the end of each month. Note that, in this example: Syntax-FV(rate, nper, pmt, pv, type) Rate=? Nper=.? Pmt=? Pv=..? Type=.?

7 Answer is Rate =5%/12 Nper =60 Pmt =-1000 Excel financial function is, =FV( 5%/12, 60, ) =$68,006.08

8 Example 2 In the example below, the Excel Fv function is used to calculate the future value of an investment of $2,000 per quarter for a period of 4 years. The interest is 10% per year and each payment is made at the start of the quarter. Rate=? Nper=.? Pmt=? Pv=..? Type=..?

9 Answer is Rate =10%4 Nper =16 Pmt =-2000 Pv =0 Type=1 Excel financial function is, =FV( 10%/4, 16, -2000, 0, 1) =$39,729.46

10 Net Present Value(NPV) Function The Excel NPV function calculates the Net Present Value of an investment, based on a supplied discount rate, and a series of future payments and income. The syntax of the function is: NPV( rate, value1, [value2], [value3],... )

11 Net Present Value(NPV) Function cont... rate - The discount rate over one period. value1, [value2],... - Numeric values, representing a series of regular payments and income, where: Negative values are treated as payments; Positive values are treated as income.

12 Example 1 Excel NPV Function Examples The spreadsheet on the right shows an example of the NPV function. The rate and value arguments that are supplied to the function are shown in cells A1 - A7 of the spreadsheet and the NPV function is shown in cell B10. This function gives the result Note that, in this example, the initial investment of $5,000 (shown in cell A2), is made at the end of the first period. Therefore, this value is included as the first value1 argument to the NPV function. NPV( rate, value1, [value2], [value3],... )

13 Answer is A 1 2% - Annual discount rate Initial investment cost after 1 year Return from year Return from year Return from year Return from year Return from year Net Present Value: 10 =NPV( A1, A2:A7 ) B

14 Example 2 The spreadsheet on the right shows an example of the NPV function in which the first payment is made at the start of the first period. Again, the rate and value arguments of the investment are shown in cells A1 - A7 of the spreadsheet and the NPV function is shown in cell B10. This function gives the result 2, Note that, as the initial investment of $10,000 (shown in cell A2), is made at the start of the first period, this value is not included in the arguments to the NPV function. Instead it is added on afterwards.

15 Answer is A 1 5% - Annual discount rate Initial investment cost at start of period Return from year Return from year Return from year Return from year Return from year Net Present Value: B 10 =NPV( A1, A3:A7 ) + A2

16 Present Value(PV) function The Excel PV function calculates the Present Value of an investment, based on a series of future payments. The syntax of the function is: PV( rate, nper, [pmt], [fv], [type] )

17 Present Value(PV)function cont.. rate - The interest rate, per period. nper - The number of periods for the lifetime of the annuity or investment. [pmt] - An optional argument that specifies the payment per period. If the [pmt] argument is omitted, the [fv] argument must be supplied. [fv] - An optional argument that specifies the future value of the annuity, at the end ofnper payments. If the [fv] argument is omitted, it takes on the default value 0. [type] - An optional argument that defines whether the payment is made at the start or the end of the period. The [type] argument can have the value 0 or 1, meaning: 0 - the payment is made at the end of the period; 1 - the payment is made at the start of the period. If the [type] argument is omitted, it takes on the default value of 0 (denoting payments made at the end of the period).

18 Example 1 Excel PV Function Examples In the following spreadsheet, the Excel Pv function is used to calculate the present value of an annuity that pays $1,000 per month for a period of 5 years. The interest is 5% per year and each payment is made at the end of the month. PV( rate, nper, [pmt], [fv], [type] ) Rate=? Nper=.? [Pmt]=? [Fv]=..? [Type]=.?

19 Answer is Rate =5%/12 Nper =60 Pmt =1000 Excel financial function is, =PV( 5%/12, 60, 1000 ) =-$52,990.71

20 Example 2 In the example below, the Excel Pv function is used to calculate the present value of an annuity that pays $2,000 per quarter for a period of 4 years. The interest is 10% per year and each payment is made at the start of the quarter. Rate=? Nper=.? [Pmt]=? [Fv]=..? [Type]=.?

21 Answer is Rate =10%/4 Nper =16 Pmt =2000 Fv =0 Type = 1 Excel financial function is, =PV( 10%/4, 16, 2000, 0, 1 ) =-$26,762.76

22 Excel PMT Function The Excel PMT function calculates the constant periodic payment required to pay off (or partially pay off) a loan or investment, with a constant interest rate, over a specified period. The syntax of the function is: PMT( rate, nper, pv, [fv], [type] )

23 Excel PMT Function cont.. rate - The interest rate, per period. nper - The number of periods over which the loan or investment is to be paid. pv - The present value of the loan / investment. [fv] - An optional argument that specifies the future value of the loan / investment, at the end of nper payments. If omitted, [fv] has the default value of 0. [type] - An optional argument that defines whether the payment is made at the start or the end of the period. The [type] argument can have the value 0 or 1, meaning: 0 - the payment is made at the end of the period; 1 - the payment is made at the beginning of the period. If the [type] argument is omitted, it takes on the default value of 0 (denoting payments made at the end of the period).

24 Example 1 Excel PMT Function Examples In the following spreadsheet, the Excel Pmt function is used to calculate the monthly payments on a loan of $50,000 which is to be paid off in full after 5 years. Interest is charged at a rate of 5% per year and the payment to the loan is to be made at the end of each month. PMT( rate, nper, pv, [fv], [type] ) Rate=? Nper=.? Pv=? [Fv]=..? [Type]=.?

25 Answer is Rate = 5%/12 Nper = 60 Pv = Excel financial function is, =PMT( 5%/12, 60, ) =

26 Example 2 In the spreadsheet below, the Excel Pmt function is used to calculate the quarterly payments required to increase an investment from $0 to $5,000 over a period of 2 years. Interest is paid at a rate of 3.5% per year and the payment into the investment is to be made at the beginning of each quarter. Rate=? Nper=.? Pv=? [Fv]=..? [Type]=.?

27 Answer is Rate = 3.5%/4 Nper = 8 Pv = 5000 [Fv] = 0 [Type] = 1 Excel financial function is, =PMT( 3.5%/4, 8, 0, 5000, 1 ) =

28 Excel RATE Function The Excel Rate function calculates the interest rate required to pay off a specified amount of a loan, or to reach a target amount on an investment, over a given period. The syntax of the function is: RATE( nper, pmt, pv, [fv], [type], [guess] )

29 Excel RATE Function cont.. nper - The number of periods over which the loan or investment is to be paid. pmt - The (fixed) payment amount per period. pv - The present value of the loan / investment. [fv] - An optional argument that specifies the future value of the loan / investment, at the end of nper payments. If omitted, [fv] takes on the default value of 0. [type] - An optional argument that defines whether the payment is made at the start or the end of the period. The [type] argument can have the value 0 or 1, meaning: 0 - the payment is made at the end of the period; 1 - the payment is made at the start of the period. If the [type] argument is omitted, it takes on the default value of 0 (denoting payments made at the end of the period). [guess] - An initial estimate at what the rate will be. If this argument is omitted, it will take on the default value of 10% (=0.1). (Note this is only a value for Excel to start off working with - Excel then uses an iterative procedure to converge to the correct rate).

30 Example 1 Excel RATE Function Examples In the following spreadsheet, the Excel Rate function is used to calculate the interest rate, with fixed payments of $1,000 per month, to pay off in full, a loan of $50,000 over a period of 5 years. The payments are to be made at the end of each month. RATE( nper, pmt, pv, [fv], [type], [guess] ) Nper=..? Pmt=.? Pv=...? [Fv]=? [Type]=..? [Guess]=.?

31 Answer is Nper = 60 Pmt = pv = [Fv] = [Type] = [Guess] = Excel financial function is, =RATE( 60, -1000, ) =0.62% Yearly Interest Rate: =12*rate =7.42%

32 Example 2 In the following spreadsheet, the Excel Rate function is used to calculate the interest rate required to save $20,000, over 2 years, with a starting value of zero, and monthly savings of $800. The payments are to be made at the start of each month. Nper=..? Pmt=.? Pv=...? [Fv]=? [Type]=..? [Guess]=.?

33 Answer is Nper = 24 Pmt = -800 pv = [Fv] = 0 [Type] = 1 [Guess] = Excel financial function is, =RATE( 24, -800, 0, 20000, 1 ) =0.33% Yearly Interest Rate: =12*rate =3.90%

34 Excel IRR Function The Excel IRR function returns the Internal Rate of Return for a supplied series of periodic cash flows (i.e. a set of values, which includes an initial investment value and a series of net income values). The syntax of the function is: IRR( values, [guess] )

35 Excel IRR Function cont.. values - A reference to a range of cells containing the series of cash flows (investment and net income values). This must contain at least one negative and at least one positive value. [guess] - An initial guess at what you think the IRR might be. This is an optional argument, which, if omitted, takes on the default value of 0.1 (=10%). (Note: This is only a value for Excel to start off working with - Excel then uses an iterative procedure to converge to the IRR).

36 Example 1 Excel IRR Function Examples In the spreadsheet below, an initial investment of $100 is shown in cell B1 and the net income over the next 5 years is shown in cells B2 - B6. The IRR function in cell C2 shows the calculation of the Internal Rate of Return after 3 years and the function in cell C4 shows the Internal Rate of Return after 5 years. IRR( values, [guess] )

37 Answer is Formula: A B C 1 Initial Investment: -$ IRR after 3 yrs: 2 Year 1 Income: $20.00 =IRR( B1:B4 ) 3 Year 2 Income: $24.00 IRR after 5 yrs: 4 Year 3 Income: $28.80 =IRR( B1:B6 ) 5 Year 4 Income: $ Year 5 Income: $41.47 Result: A B C 1 Initial Investment: -$ IRR after 3 yrs: 2 Year 1 Income: $ % 3 Year 2 Income: $24.00 IRR after 5 yrs: 4 Year 3 Income: $ % 5 Year 4 Income: $ Year 5 Income: $41.47

38 Thank you