Chapter.06

Chapter 6
Evaluating the Financial Impact
of Loans and Investments

Chapter Introduction

• Fundamental financial calculations used to
evaluate different financing options
• Developing an amortization table—a listing by
period of the cash inflows and outflows
• Excel tools for calculating depreciation
(technique used to allocate costs of an asset
over its useful life)
• Ramifications of cash flows; tools for analyzing
the financial viability of a project
Succeeding in Business with Microsoft Excel 2010 2

Chapter Introduction (continued)

• Functions covered in this chapter:
CUMIPMT, CUMPRINC, FV, IPMT, IRR, ISNUMB
ER, NPER, NPV, PMT, PPMT, PV, RATE, SLN

To go to Level 1, click here


Functions Covered in this Chapter
• CUMIPMT
• CUMPRINC
• FV
• IPMT
• IRR
• ISNUMBER
• NPER
• PMT
• PPMT
• PV
• RATE
• SLN

Level 1 Objectives: Calculating the Values for
Simple Financial Transactions
• Understand how simple interest and
compound interest are calculated
• Determine the value of a loan payment
• Analyze positive and negative cash flows
• Determine the future value and the present
value of a financial transaction
• Determine the interest rate and the number
of periods of a financial transaction

Understanding How Interest Is Calculated

• Factors that can affect interest
– How long do you want to borrow the money?
– What level of risk is the lender assuming in lending
the money?
– What are the current monetary policies and levels of
supply and demand to borrow versus lend money?
• Ways interest is accounted for
– Simple interest
– Compound interest

Succeeding in Business with Microsoft Excel 2010 Level 1 home 6

Calculating Simple Interest

• Paid solely on the amount of the original
principal value
• Simple interest = Principal * Interest rate per
time period * Number of time periods


Calculating Compound Interest

• Adding interest earned each period to the
principal for purposes of computing interest for
the next period
• Has greater total value than simple interest
• Used by most financial institutions
• Annual percentage yield (APY)
– Equivalent yearly simple interest rate, taking
compounding into account
• Annual percentage rate (APR)
– Reflects interest being paid on actual amount
borrowed


Reviewing Alternative Financing Options

• Excel’s financial functions perform calculations
to help determine the most feasible financing
option
– PMT
– RATE
– NPER
– PV
– FV


Using the PMT Function to Determine a Loan
Payment
• Finds value of payment per period, assuming
are constant payments and constant interest
rate for duration of loan
• PMT(rate,nper,pv,fv,type)


Using the PMT Function to Determine a Loan
Payment


Arguments of the PMT Function

rate Interest rate per compounding period

nper Number of compounding periods
pv Present value
fv Future value (compounded amount)

type Designates when payments are made
Type 0 – end of period
Type 1 – beginning of period


Understanding Cash Flow
(Inputs And Outputs)


Specifying Consistent
Units of Time
• Financial functions apply the interest rate per
period and the payment per period to the
principal value over a specified number of
periods


Determining the Value
of the Loan Payment


Using a Financial Function
with Cell Referencing


Using the RATE, NPER, PV,
and FV Functions


Determining the Future Value of a Financial
Transaction


Determining the Present Value of a Financial
Transaction


Determining the Interest Rate of a Financial
Transaction


Determining the Number of Periods of a
Financial Transaction


Writing Formulas
for Other Loan Options
Down payment • Adjust present value (pv) to reflect
exact value of the loan
Balloon payment • Specify negative future value (fv)
Mortgage fees • Adjust the pv of the loan by
subtracting the fees from the loan
amount
• Recalculate the interest rate using
the same payments and loan
periods, with the new pv amount


Selecting a Financing Option


Level 1 Summary

• Basic Excel functions for calculating the
elements of a loan (PMT, RATE, NPER, PV, FV)
• How these functions affect positive and
negative cash flows of a financial institution


Level 2 Objectives: Creating a Projected Cash
Flow Estimate and Amortization Table
• Set up an amortization table to evaluate a
loan
• Calculate principal and interest payments
• Calculate cumulative principal and interest
payments
• Set up named ranges for a list
• Calculate depreciation and taxes


Designing the Cash Flow Estimate of a
Worksheet
• Amount of money coming in or out of a
company each year
• Combination of revenues and expenses with
the effects of required capital investment and
financing


Identifying the Missing Data Elements

• Depreciation is the process by which a
company spreads the expense of an asset over
its useful life.


Setting Up an Amortization Table

• Standard method of detailing a loan
transaction
• Lists, for each specific loan period, the
remaining principal and the value of the
payment apportioned to interest expense and
to principal pay down


Setting Up an Amortization Table


Calculating Principal and Interest Payments

• IPMT function
– Calculates the value of the interest payment for a
specified period
– IPMT(rate,per,nper,pv,fv,type)
• PPMT function
– Calculates the value of the principal payment for a
specified period
– PPMT(rate,per,nper,pv,fv,type)


Arguments of the
PPMT and IPMT Functions
rate Interest rate per period
per Period for which interest or principal amount will be
calculated
nper Total number of periods in the financial transaction

pv Value at the beginning of the financial transaction
fv Value at the end of the financial transaction
type Payment type of 0 or 1 (made at beginning or end of
each period, respectively)


Between Two Periods
• CUMIPMT function
– Automatically calculates interest values between
two periods
– CUMIPMT(rate,nper,pv,start_period,
end_period,type)
• CUMPRINC function
– Automatically calculates principal values between
two periods
– CUMPRINC(rate,nper,pv,start_period,
end_period,type)

Between Two Periods


Calculating Depreciation Using the SLN
Function
• Straight line depreciation method
– Approximation of actual depreciation allowed by the
tax code
– Allocates value of an asset evenly throughout the life
of the asset
• =SLN(cost,salvage,life)
– Cost – Initial cost of the asset
– Salvage – Value at the end of depreciation
– Life – Number of periods over which the asset is
depreciated


Calculating Depreciation Using the SLN
Function


Alternative Depreciation Options Provided in
Excel

Function Definition Syntax
Double-declining Computes depreciation at an DDB(cost,salvage,life,
balance accelerated rate period,factor)

Sum of the years Depreciation apportioned SYD(cost,salvage,life,
digits based on declining fractional per)
amount of asset’s life
Fixed-declining Returns depreciation of asset DB(cost,salvage,life,
balance for a specified period using period,month)
fixed-declining balance method
Variable-declining Returns depreciation of asset VDB(cost,salvage,life,
balance for a specified period using start_period,end_period,
double-declining balance factor,no_switch)
method


Calculating Taxes


Completing the Analysis


Level 2 Summary

• Amortization tables
• Calculating principal and interest payments
with PPMT and IPMT
• Calculating cumulative principal and interest
payments with CUMPRINC and CUMIPMT
• Calculating depreciation using the straight line
method
• Calculating taxes

Level 3 Objectives: Evaluating the Financial
Viability of Alternative Project Options
• Set up a worksheet to analyze profitability
• Calculate the net present value
• Calculate the internal rate of return
• Calculate the return on investment
• Determine the payback period


Setting Up a Worksheet to Analyze Profitability


Calculating Net Present Value (NPV)

• Uses expected cash flows and applies a
minimum rate of return (hurdle rate) to
discount these cash flows into current
(present) value dollars
• Enables you to see current worth of projected
cash flows
• NPV(rate,value1,value2,…)
• Has several requirements


Setting Up a Table of Hurdle Rates


Calculating the Internal Rate of Return (IRR)

• Considers the cash flows and discounts them
back to the present value
• Calculates rate at which the discounted cash
flows in and out are equal
• IRR(values,guess)


Calculating the
Internal Rate of Return (IRR)


Creating a Chart Showing the Hurdle Rate
Versus NPV


Return on Investment (ROI)

• Sum of the cash flows, excluding initial
investment, divided by the investment value


Calculating the ROI


Determining the Payback Period

• Payback period
– Time it will take to earn sufficient profits so the
loan can be paid back
• Payback year
– Year in which cumulative total cash flow is greater
than or equal to $0


Determining the Payback Period


Evaluating the Results
of the Analysis


Level 3 Summary

• Exploration of the profitability of a financial
venture by:
– Calculating the NPV
– Calculating the IRR
– Determining the ROI
– Determining the payback period


Chapter Summary

• Calculating the values for simple financial
transactions
• Creating a projected cash flow estimate and
amortization table
• Evaluating the financial viability of alternative
project options


Chapter.06

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