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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

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