PV Tutorial Using Excel


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1 EYK 153 PV Tutorial Using Excel TABLE OF CONTENTS Introduction Exercise 1: Exercise 2: Exercise 3: Exercise 4: Exercise 5: Exercise 6: Exercise 7: Exercise 8: Exercise 9: Exercise 10: Exercise 11: Exercise 12: Calculating FV (Lump Sum) Calculating Interest Rate (Lump Sum) Calculating Investment Period (Lump Sum) Calculating PV (Lump Sum) Calculating Monthly Payments I (Annuity) Calculating Monthly Payments II (Annuity) Calculating FV (Annuity) Calculating PV (Annuity) Calculating Interest (Annuity) Calculating Investment Period (Annuity) Calculating NPV (Unequal Payments) Using NPV Key to Calculate PV (Unequal Payments) INTRODUCTION Excel is a spreadsheet application that includes tools to make the solving of financial equations efficient. This tutorial will focus on Excel s ability to solve PV/FV problems. It will be based on the same Exercises used in EYK 152 where PV/FV problems were solved using calculator keystrokes in lieu of PV/FV tables (the tables are in EYK 151). 1
2 2 Extend Your Knowledge 153 PV Tutorial Using Excel When you open an Excel spreadsheet (worksheet), it will look like the following: Functions to solve PV/FV problems can be accessed by clicking on the arrow next to the Σ icon. A dropdown menu as shown will appear from which you can make the appropriate function choice to help you solve a problem. Click on More Functions in the dropdown menu and the following applet will appear: To solve the first exercise in this tutorial, we will need to type in FV because we are trying to calculate the future value.
3 Extend Your Knowledge 153 PV Tutorial Using Excel 3 Then click OK at the bottom of the applet and the following screen will appear. Notice that it tells you what you are trying to solve for, which in this case is the FV (future value). Let s begin now with Exercise 1.
4 4 Extend Your Knowledge 153 PV Tutorial Using Excel EXERCISE 1: CALCULATING FV (LUMP SUM) If you invest $1,000,000 for 10 years at a stated annual rate of 6% with interest earned monthly, what is the future value? Rate: The interest rate is expressed as a decimal: 6% We want monthly interest so we need to divide by 12. Solution: Nper: The number of periods is 10 years 12 months/year or 120 periods. Pmt: This is not an annuity question so there is no payment. Pv: The present value is the cash outflow, expressed as a negative (as opposed to a cash inflow which is a positive). Type: The cash outflow (or inflow) is at the beginning of the period which is denoted with a 1 (as opposed to an outflow or inflow at the end of a period which would be denoted by a 0 or just left blank). Formula result $1,819,396.73, the future value of investing $1,000,000 at the beginning of a 10year period with interest calculated monthly at the rate of 6%.
5 Extend Your Knowledge 153 PV Tutorial Using Excel 5 EXERCISE 2: CALCULATING INTEREST RATE (LUMP SUM) If you invest $1,000,000 for 10 years with interest earned monthly, what interest rate is necessary to achieve a future value of $1,938,621? Solution: We are trying to find the interest rate so that is the Excel function we need to look for. Use the Insert Function applet described previously to bring up the following Rate function. Nper: The number of periods is 10 years 12 months/year or 120 periods. Pmt: This is not an annuity question so there is no payment. Pv: The present value is the cash outflow of , expressed as a negative (as opposed to a cash inflow, which is a positive). Fv: The future value is the required cash inflow of , a positive (as opposed to a cash outflow, which would be a negative). Type: The cash outflow (or inflow) is at the beginning of the period, which is denoted with a 1 (as opposed to an outflow or inflow at the end of a period, which would be denoted by a 0 or just left blank). Formula result interest per period which is per month in this case 12 months/year % %. Therefore, if we invest $1,000,000 that earns an interest rate of 6.64% (rounded) compounded monthly, we will have $1,938,621 at the end of 10 years.
6 6 Extend Your Knowledge 153 PV Tutorial Using Excel EXERCISE 3: CALCULATING INVESTMENT PERIOD (LUMP SUM) If you are able to invest $5,000,000 and earn interest of 10% per year, in how many years will the investment have a future value of $12,500,000? Solution: We are trying to find the number of periods so that is the Excel function we need to look for. Use the Insert Function applet to bring up the following NPER function. Rate: The interest rate is expressed as a decimal: 10% 0.1. Pmt: This is not an annuity question so there is no payment. Pv: The present value is the cash outflow of , expressed as a negative (as opposed to a cash inflow, which is a positive). Fv: The future value is the required cash inflow of , a positive (as opposed to a cash outflow, which would be a negative). Type: The cash outflow (or inflow) is at the beginning of the period, which is denoted with a 1 (as opposed to an outflow or inflow at the end of a period, which would be denoted by a 0 or just left blank). Formula result periods, which in this case is years. Be sure to check whether your answer is in months or years if the interest rate was input as a monthly rate, then the periods would be number of months. So, in this question, if we invest $5,000,000 at the rate of 10% interest, we will have $12,500,000 after years (rounded).
7 Extend Your Knowledge 153 PV Tutorial Using Excel 7 EXERCISE 4: CALCULATING PV (LUMP SUM) You want to have $150,000 in 15 years to pay for your child s postsecondary education. Assuming interest is earned annually at a rate of 4.5%, how much do you have to invest today? Solution: We are trying to find the present value so that is the Excel function we need to look for. Use the Insert Function applet to bring up the following PV function. Rate: The interest rate is expressed as a decimal: 4.5% Nper: The number of periods is 15 years. Pmt: This is not an annuity question so there is no payment. Fv: The future value is the required cash inflow of , a positive (as opposed to a cash outflow, which would be a negative). OR Type: Because we are calculating present value, the formula automatically assumes that the transaction occurs at the beginning of the period. Therefore, you get the same answer whether you leave Type blank or include 1 both are shown to verify this for you try it! Formula result which means that if we invest $77,508 today, we will have $150,000 in 15 years if the annual interest rate is 4.5%.
8 8 Extend Your Knowledge 153 PV Tutorial Using Excel EXERCISE 5: CALCULATING MONTHLY PAYMENTS I (ANNUITY) You want to have $80,000 in 20 years to pay for your child s postsecondary education. Assuming interest is earned monthly at an annual stated rate of 7.25%, what will the monthly payments be? Solution: We are trying to find the monthly payment so that is the Excel function we need to look for. Use the Insert Function applet to bring up the following PMT function. Rate: The interest rate is expressed as a decimal: 7.25% /12 (divide by 12 because payments and therefore interest additions are monthly). Nper: The number of periods is 20 years 12 months/year. Pmt: This is not an annuity question so there is no payment. Pv: There is no present value (no lump sum at the beginning) because this is an annuity. Fv: The future value is the required cash inflow of 80000, a positive (as opposed to a cash outflow, which would be a negative). Type: Payments are assumed to be made at the end of the period unless stated otherwise. Therefore, in this case we can leave Type blank or put in 0. If we insert a 1, we get the incorrect answer even though it appears to be close to the correct answer. Be careful not to make this kind of error. Incorrect Formula result which means that by paying $ (rounded) each month for 20 years, we will have $80,000 if the annual interest rate is 7.25%. Incorrect answer
9 Extend Your Knowledge 153 PV Tutorial Using Excel 9 EXERCISE 6: CALCULATING MONTHLY PAYMENTS II (ANNUITY) You have purchased a home and are applying for a $250,000 mortgage. The stated annual interest rate is 4.8%. What will the monthly payments be if you choose to pay the house off in (a) 15 years? (b) 20 years? Solution: We are trying to find the monthly payment so that is the Excel function we need to look for. Use the Insert Function applet to bring up the following PMT function. a. b.
10 10 Extend Your Knowledge 153 PV Tutorial Using Excel EXERCISE 7: CALCULATING FV (ANNUITY) You are starting a retirement savings plan and can afford to invest $500 at the end of each month for the next 25 years. What is the future value of this investment stream assuming a stated annual interest rate of (a) 5%? (b) 8%? Solution: We are trying to find the future value so that is the Excel function we need to look for. Use the Insert Function applet to bring up the following FV function. a. b.
11 Extend Your Knowledge 153 PV Tutorial Using Excel 11 EXERCISE 8: CALCULATING PV (ANNUITY) You want to have $2,000,000 in 22 years for your retirement. Assuming a stated annual interest rate of 7%, how much do you have to invest monthly (interest is earned monthly)? Solution: We are trying to find the monthly payment (how much do we invest or pay each month) so that is the Excel function we need to look for. Use the Insert Function applet to bring up the following PMT function.
12 12 Extend Your Knowledge 153 PV Tutorial Using Calculator (TI BA II Plus) EXERCISE 9: CALCULATING INTEREST (ANNUITY) You want to have $55,000 in 10 years to pay for a new car. You have committed to saving $300 per month. What stated annual interest rate will allow you to meet your goal? (Assume interest is earned monthly.) Solution: We are trying to find the interest rate so that is the Excel function we need to look for. Use the Insert Function applet to bring up the following RATE function.
13 Extend Your Knowledge 153 PV Tutorial Using Calculator (TI BA II Plus) 13 EXERCISE 10: CALCULATING INVESTMENT PERIOD (ANNUITY) You estimate that you will need $25,000 to take your family on a memorable vacation. Assume a stated annual interest rate of 6% and monthly contributions of $700 to a savings account. How many months will it take to achieve your goal? Solution: We are trying to find the number of periods so that is the Excel function we need to look for. Use the Insert Function applet to bring up the following NPER function.
14 14 Extend Your Knowledge 153 PV Tutorial Using Calculator (TI BA II Plus) EXERCISE 11: CALCULATING NPV (UNEQUAL PAYMENTS) You are purchasing a machine at a cost of $10,000 and an additional $1,500 for installation costs. You estimate the net revenues generated by the machine in years 1 through 5 will be $6,000, $14,000, $15,000, $17,000, and $18,000 respectively. After the fifth year, you will sell the machine for $2,000. What is the net present value, assuming a profit objective of 20% per year? Solution: We are trying to find the net present value for x number of cash flows so that is the Excel function we need to look for. Use the Insert Function applet to bring up the following XNPV function. A B 1 Values Dates January 1, December 31, December 31, December 31, December 31, December 31, 2016 To start, set up a schedule in Excel. In Column A, as shown below, list the cash inflows/outflows. In Cell A2, notice that the $10,000 purchase price of the machine was added to the $1,500 installation costs to get an $11,500 cash outflow (negative value because it is an outflow as opposed to an inflow). Then, in Column B, type in random dates that reflect the stream of inflows/ outflows. To get the dates to appear as shown to the left, go to the top menu bar, click on format, cell, date, and *January 1, 2012 just makes it easier to read in the author s humble opinion but any date format will work! Notice in Cell B7 that the value is $20,000, which is the $18,000 cash inflow from the net revenues plus the $2,000 resulting from the sale of the machine at the end of its life. NOTE: Place your cursor in ANY Excel cell other than those in the table to the left. Now open the XNPV function. Rate: 20% which is input as 0.2 Values: Put your cursor in the Values box and then go to the Excel spreadsheet and select cells A2 to A7. You should automatically see A2:A7 appear as shown in the Values box to the right. Now hit the tab key or manually place your cursor in the Dates box. Dates: With your cursor in the Dates box, go to the Excel spreadsheet and select cells B2 to B7. Formula result: You should now see Because the result is positive, it means that the investor s desired 20% return will be achieved by this investment.
15 Extend Your Knowledge 153 PV Tutorial Using Calculator (TI BA II Plus) 15 EXERCISE 12: CALCULATING PV (UNEQUAL PAYMENTS) You are planning to provide customers a new service with anticipated net revenues each year for the next four years of $8,000, $15,000, $25,000, and $40,000 respectively. No initial investment is required because the service can be provided using existing unused capacity. Assume a stated annual interest rate of 8%. What is the present value of this stream of cash flows? Solution: We are trying to find the net present value for x number of cash flows so that is the Excel function we need to look for. Use the Insert Function applet to bring up the following XNPV function. To start, set up a schedule in Excel. In Column A, as shown below, list the cash inflows/outflows. In Cell A2, notice that because there is no beginning of period cash inflow/outflow we have 0 at January 1, The function needs a starting point in order to properly discount the $8,000 at December 31, NOTE: Place your cursor in ANY Excel cell other than those in the table to the right. A B 1 Values Dates 2 0 January 1, December 31, December 31, December 31, December 31, 2015 Now open the XNPV function. Rate: 8% which is input as 0.08 Values: Put your cursor in the Values box and then go to the Excel spreadsheet and select cells A2 to A6. You should automatically see A2:A6 appear as shown in the Values box to the left. Now hit the tab key or manually place your cursor in the Dates box. Dates: With your cursor in the Dates box, go to the Excel spreadsheet and select cells B2 to B6. Formula result: You should now see Because the result is positive, it means that the investor s desired 8% return will be achieved by this investment.
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