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Calculate and compare the different returns on an investment using the ROI, NPV,
IRR functions.
nper:
pmt:
The payment made each period. Remains unchanged over the life of the loan or
annuity.
pv:
fv:
The future value of an investment, or the cash balance you want to attain after
the last payment is made. If fv is omitted it is assumed to be zero (fv = 0 for a
loan)
type:
Indicates when payments are due: type= 0, payments due at end of period;
type= 1, payments due at beginning of period; If omitted type is assumed to be
zero.
RATE(nper, pmt,PV,fv,type)
Returns the interest rate per period of a given investment. For example:
What interest rate do you need to double the value of an investment of 1000
over 10 years? Interest Rate =RATE(10,0,-1000,2000) =7.2%
What interest rate do you need to generate 15,000 at the end of 5 years if you
are depositing 2,000 per year into an investment account?
Interest Rate =RATE(5,-2000,0,15000) = 20.4%
How would the interest rate be affected if your account has an initial balance of
2,389? In this case the Interest Rate required
=RATE(5,-2000,-2389,15000) = 7.4%
NPER(rate,pmt,PV,fv,type)
Calculates the number of payments required for an investment of present value (PV) to
reach a future value (fv) while earning interest at rate. For example, how long will it take
you to save 50,000 if the balance on your savings is currently 633 and you intend to
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deposit 2,000 at the end of each year? Assuming an interest rate of 11.5%, time
needed: = NPER(11.5%,-2000,-633,50000) = 12.12 years.
FV(rate,nper,pmt,PV,type)
Returns the future value of an investment where periodic payments (pmt) are invested
for a number of periods (nper) at interest rate. PV and type are optional: type is 0 if
payments are made at the end of the period, 1 if made at the start. Conventionally you
use a negative number when money is paid out of your pocket, and a positive number
when money is paid to you. For example:
If you put 500 each year into a savings account earning 15% interest per annum
then the value of your savings after 6 years
=FV(15%,6,-500) = 4,376.87.
If you currently have savings of 340 and decide to invest 250 each year for the
next 10 years into an account earning interest at 15% per annum, then the value
of your savings at the end of the period:
= FV(15%,10,-250,-340)
= 6451.42 if you deposited your money at the end of the month, OR
= FV(15%,10,-250,-340,1)
= 7212.81 if you deposited your money at the beginning of the month.
PV(rate,nper,pmt,fv,type)
Returns the present value of an investment. For example, you have just won a prize
which is either: 20,000 per year for the next 12 years or a 30,000 bond which matures
in 15 years. Which should you choose? Assume you will invest the regular payment at
10%.
The present value of the regular payment = PV(10%,12,-2000) = 136,273.84
The present value of the bond = PV(10%,15,0,-30000) = 71,817.61
No contest!
NPV(rate,values)
Rate is the discount rate. Values is the range of cells containing the cash flows.
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NPV returns the net present value of an investment based on a series of cash flows
(receipts or payments). A negative NPV means that the rate of return on the project is
less than the discount rate, and it would have been better to have kept the money in the
bank at the given rate of interest. In deciding on whether to invest in a particular project,
you would generally accept projects with positive NPVs, the larger the NPV the better.
However there is a need to NPV against the Payback Period.
IRR(values,guess)
Values is the range of cells containing the cash flows; guess provides an estimate of the
final result, if nothing is entered Excel assumes a value of 10%.
IRR returns the internal rate of return for an investment (i.e. a measure of its
profitability), without financing costs or reinvestment gains. If IRR is less than the
Discount Rate then NPV will be negative. The higher IRR the more positive the value of
NPV.
A Worked Example
1.
2.
If the discount rate is 15% calculate whether the project is worth undertaking, using
(a) NPV and (b) IRR.
3.
Insert a new worksheet and rename it ho23. Then construct a table that calculates
the required values:
4.
Finally add a scroll bar or spinner control that enables the user to perform what-if
calculations by changing the value of the discount rate:
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6.
It is estimated that the projects will generate the cash flows shown in the table
below:
Year
Project A
Project B
Project C
Investment:
-100,000
-100,000
-100,000
Cash In-Flows:
10,000
60,000
35,000
20,000
40,000
30,000
30,000
20,000
30,000
30,000
10,000
30,000
30,000
20,000
35,000
10,000
7.
Calculate (a) the Payback Period and (b) the ROI of the project.
8.
If the discount rate is 10% calculate (a) NPV and (b) IRR.
9.
What project would you rank of greatest value to Bacchus on purely financial
grounds? Would your decision change if the discount rate increased? Add a scroll bar
or spinner control that enables you to perform What-If calculations by changing the
value of the discount rate.
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Investment Appraisal:
http://www.bized.co.uk/timeweb/reference/using_experiments.htm
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