Concepts covered: Time value of money, NPV, IRR, Data Table, PMT, FV
Problem 0: o! to "enerate Fre#uency distribution of $toc% returns&
Problem 1: Excel File: Excel Intro.xls:: Sheet name: NPV_IRR "iven discount rate or 'pportunity Cost ( )*+ ) ,ear ) - . / 0 Cas1 flo!s )** )** )** )** )** a2 Find t1e present value of t1e above Cas1 Flo!s3 Note1: Excel uses the letters NPV to denote the present value of a series of cash flos. !o compute the NPV" e need to calculate the present value of future cash flos and su#tract from this the value of time$%ero cash flo &!his is usuall' the cost of the asset in (uestion). !he excel definition of NPV &rate" value1" value*"+) ala's assumes that the first cash flo occurs after one period. b2 Ta%in4 t1e above e5ample for!ard, suppose if !e paid /** for t1e above series of cas1 flo!s3 61at is t1e IRR of t1e Cas1 flo!s Note*: !he IRR is defined as the compound rate of return that ma,es the NPV e(ual to %ero. !he IRR &values"-uess) is the compound return of return paid #' the investment. For #oth NPV and IRR cash flos must #e e(uall' spaced in time and order. If cash flos are not e(uall' spaced in time then explore .NPV and .IRR functions of excel. c2 Consider a stoc% payin4 a dividend of Rs - 7nnually t1at currently sells for Rs3 0*3 ,ou purc1ase t1e $toc% today and collect Rs3 - dividend, and t1en sell t1e stoc% for Rs3 0. at year end3 ,our rate of return 8IRR2 is&&& Problem 2: Refer: Excel File: Excel Intro.xls:: Sheet name: IRR_/oalsee, o! to compute IRR of t1e follo!in4 cas1 flo!s usin4 a loan table& Year Cash flow 0 -1000 1 300 2 200 3 150 4 600 5 900 ) In financial literature you !ill find many synonyms for opportunity cost, amon4 t1em discount rate, cost of capital and interest rate3 61en is it applied to ris%y cas1 flo!s, !e !ill sometimes call t1e opportunity cost t1e ris%9ad:usted discount rate or t1e !ei41ted avera4e cost of capital or re#uired rate of return computed based on a model li%e C7PM3 Problem 3: Refer: Excel File: Excel Intro.xls:: Sheet name: 0ult.IRR T1e Problem of Multiple Internal Rate of Return 8IRR2 Tec1nically 7 set of cas1 flo!s can 1ave multiple IRRs only if it 1as at least t!o c1an4es of si4n3 Many typical cas1 flo!s 1as one si4n c1an4e 8 ;5: bond cas1 flo!s23 Can !e identify t1e t!o IRR<s& Problem 4: Refer: Excel File: Excel Intro.xls:: Sheet name: NPV_IRR_/ Consider a pro:ect t1at 1as an initial cost of ),)0* and seven subse#uent cas1 flo!s3 T1e cas1 flo!s in year )9= 4ro! at rate 4, so t1at t1e cas1 flo! in year t is CFt ( CFt9)>8)?423 "iven 4ro!t1 rate()*+ and Discount rate ()0+3 61at if analysis: o! does NPV and IRR c1an4e !it1 c1an4e in 4ro!t1 rates3 'r 1o! does NPV c1an4e !it1 c1an4e in 4ro!t1 rates and discount rates3 Problem 5: Refer: Excel File: Excel Intro.xls:: Sheet name: E0I ,ou ta%e a loan of )*,*** at an interest rate of = percent per year3 T1e ban% !ants you to ma%e a series of payments 8;MI2 t1at !ill pay off t1e loan and t1e interest over si5 years3 6e use ;5cel PMT function to determine 1o! muc1 eac1 annual payment s1ould be: PMT 8rate,nper,pv,fv,type2 Fv and type are optional ar4uments if omitted t1ey are assumed to be @ero3 Problem 6: Refer: Excel File: Excel Intro.xls:: Sheet name: FV12 $uppose you deposit )*** in an account in year *,No! let us assume t1at to t1e initial deposit of ),*** t1is year !ill be follo!ed by similar deposit at t1e be4innin4 of years ),-, A B3 if t1e account earns )*+ 1o! muc1 !ill you 1ave in t1e account at t1e start of year )*& Problem 7: Refer: Excel File: Excel Intro.xls:: Sheet name: Ret_Solver 7 is 00 no! and plans to retire at a4e C*, and !ant to save D rupees so t1at after retirement 7 can !it1dra! .**** eac1 year from t1e account3 o! muc1 s1ould 7 save in t1e first five years if 1e e5pects to earn E+ in PPF& 7 can plan for any number of years but E years nicely fits into t1e screen so let us assume t1at 7 !ants to plan for only E years after retirement and !ants to FDI; GR'H;I3