Excel financial tools

1. Excel Financial Tools
Krishan K. Pandey (Ph.D.)
Professor & Director,
Office of Doctoral Studies, O.P. Jindal Global University,
Sonipat, Haryana.
Webpage: www.krishanpandey.com

2. NPV—Net Present Value
➢ The Net Present Value is an approach/procedure used in long-term capital
investment budgeting, where the present value of cash inflows is subtracted
from the present value of cash outflows.
➢ In other words: the process of calculating the value of an investment by
adding the present value of expected future cash flows to the initial cost of
the investment.
➢ NPV is used to analyze the profitability of an investment/project.
➢ NPV compares the value of a dollar today versus the value of that same
dollar in the future, taking inflation and return into account.
➢ When the NPV of a project is positive, it should be accepted. When it is
negative, the project should be rejected because cash flows will be
negative.
➢ NPV= CF0 + CF1/(1 + r) + CF2/(1 + r)^2 + CF3/(1 + r)^3.....+CFt/(1 + r)^n

3. Calculating the NPV with formulas
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4. Calculating the NPV with formulas
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5. IRR—INTERNAL RATE OF RETURN
• Internal rate of return is the discount rate that
makes the present value of the future cash
flows of an investment equal the cost of the
investment.
• In other words, the objective is to find the
discount rate which will make NPV equal to
zero.
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6. The IRR is calculated by a trial and error process starting with a guess rate. After a number
of iterations, Excel finds the rate which makes the NPV equal to zero.
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7. Unconventional Financial Functions:
XNPV and XIRR
➢For uneven interval cash flows, use the XNPV
and XIRR functions
Example: Consider an example where you invest
$50,000 on a certain date and the cash flows are
as shown in the following table.
January 1, 2009 $50,000.00
October 1, 2009 $12,000.00
June 15, 2010 $6,000.00
October 25, 2010 $15,000.00
December 31, 2010 $8,000.00
March 1, 2011 $7,000.00
June 15, 2012 $15,000.00

8. EXCEL XNPV—THE NET PRESENT VALUE FUNCTION FOR UNEVEN
INTERVALS
➢ We cannot use the NPV on this uneven interval cash flow case; however,
we can use the XNPV function. This time, when we use the XNPV
function, we do have to include the initial investment cash flow in the
function. (The NPV does not allow inclusion of the initial investment,
which then needs to be subtracted from the Excel-calculated NPV.)
➢ The syntax of the function is: XNPV (rate, values, dates).
– Where Rate is a number specifying the annual discount (or interest)
rate.
– Values are the numbers that specify cash flow values. There must be in
your data selection at least one negative value (a payment), as well as
one positive value (a receipt).
– The first date represents the start of the project. The dates may occur in
any order afterward, as long as they are after the start date.

10. EXCEL XIRR—THE INTERNAL RATE OF RETURN FUNCTION FOR
UNEVEN INTERVALS
Consider again the same example where we invest
$50,000 on a certain date and the cash flows are as
shown in the following table:
January 1, 2009 $50,000.00
October 1, 2009 $12,000.00
June 15, 2010 $6,000.00
October 25, 2010 $15,000.00
December 31, 2010 $8,000.00
March 1, 2011 $7,000.00
June 15, 2012 $15,000.00
You cannot use the IRR on this uneven interval cash flow
case, but you may use the XIRR function. The syntax of the
function is XIRR (values, dates, guess).

11. Here we have to follow again the same definitions and rules that we used for the XNPV:
the values are the numbers or number that specify cash flow values. There must be in
your data selection at least one negative value (a payment), as well as one positive value
(a receipt). The first date represents the start of the project. The dates may occur in any
order afterward, as long as they are after the start date. The guess value is either your
guess or 10 percent—the default value.

12. Frequently Used Financial Functions
• Support that you are purchasing a car for $22,000. You are
required to give $4,000 as a down payment. The annual
interest rate is 8.00 % and the loan period is 3 years. Assume
end-of-period monthly payments.
PMT (rate; nper; pv; fv; type)
• This function calculates the payment for a loan based on
constant payments and a constant interest rate, as defined
within the dialog box.
Where,
• rate is the interest rate per period. In this example, the loan is
at an 8 percent annual interest rate and since the payments
are on a monthly basis, the interest rate per month is 8%/12,
or 0.67 percent. You could enter 8%/12, or Rate/12, 0.67%, or
0.0067, in the field for the rate.

13. • nper is the total number of payment periods in a loan or annuity. In this example,
the loan reimbursement is through monthly payments, therefore your loan has 3*12
or Years*12 periods. You could also enter 36 into the formula for nper.
• pv is the present value of the loan. It is also referred to as the principal. You should
always enter it as a negative value in the Excel formula. This amount in this
example is $18,000.
• fv is defined as ‘‘ . . . the future value, or a cash balance you want to attain after the
last payment is made.’’ This is what we call a balloon payment, it is a large, lump
sum payment made at the end of a long-term balloon loan. Balloon payments are
most commonly found in mortgages, but could also be attached to auto and
personal loans as well. If the FV field is not filled, it is assumed to be 0 (zero)—
meaning that the future value of the loan after the last payment is made will be 0. If
the FV is not 0, make sure that you add a – (minus) sign in front of the number
value. For example: PMT (0.5%, 48, 20000, 5000).
• type indicates when payments are due and is either the number 0 or 1. When type is
omitted, it is assumed to be 0, which means that the payments are made at the end
of the period. When the type is 1, it is assumed that the payments are due at the
beginning of the period, as is the case in some mortgage situations.

15. Similar Excel Functions
• PV—Present Value Present Value is the total amount that a series of
future payments or cash flows is worth today, given a specified rate of
return. If you are offered an investment that will pay you $500 per month
for the next 10 years, and if you could earn a rate of 8% per year on similar
investments (you may want to call in opportunity cost), how much should
you be willing to pay for this annuity? This is an example of when you will
be using the PV function.

16. • FV—Future Value Future Value is the value of an investment based on
periodic, constant payments, and a constant interest rate. Suppose that
you will be paying $500 every month, for 10 years, at a rate of 8 percent,
and then receiving a lump sum back immediately after paying the last
payment. How much would you have to get in the future? This is an
example of when you will be using the FV function.

17. NPER—Number of Periods Consider, for example, that you are about to retire.
You have a sum of $800,000 available in your savings (the amount that you will
be drawing on for the rest of your life). If you expect to earn 5 percent per year
on average (the discount rate) and withdraw $5,000 per month, how long will it
take to burn through your savings (in other words, how long can you afford to
live)?

18. • RATE In this last example, assume that you invest $30,000
(say, in a piece of equipment), and that this investment will
generate $500 net income per month over the next seven
years. If you purchase this piece of equipment or make any
other such investment, what is your compounded average
annual rate of return?