A

1
COMPUTING
2 Discount rate
3
4
Year
5
1
6
2
7
3
8
4
9
5
10
11 Net present value
12
Summing cells C5:C9
13
Using Excel's NPV function
14
Using Excel's PV function

THE PRESENT VALUE

10%

Cash flow
100
100
100
100
100

Present
value
90.9091
82.6446
75.1315
68.3013
62.0921

<-<-<-<-<--

=B5/(1+$B$2)^A5
=B6/(1+$B$2)^A6
=B7/(1+$B$2)^A7
=B8/(1+$B$2)^A8
=B9/(1+$B$2)^A9

379.08 <-- =SUM(C5:C9)

379.08 <-- =NPV(B2,B5:B9)
379.08 <-- =PV(B2,5,-100)

COMPUTING THE PRESENT VALUE

In this example the cash flows are not equal
Either discount each cash flow separately or use Excel's NPV
function
Excel's PV doesn't work for this case

1
2 Discount rate
3

4
Year
5
1
6
2
7
3
8
4
9
5
10
11 Net present value
12
Summing cells C5:C9
13
Using Excel's NPV function

10%
Cash
flow
100
200
300
400
500

Present
value
90.9091
165.2893
225.3944
273.2054
310.4607

Present value
of each cash flow
<-- =B5/(1+$B$2)^A5
<-- =B6/(1+$B$2)^A6
<-- =B7/(1+$B$2)^A7
<-- =B8/(1+$B$2)^A8
<-- =B9/(1+$B$2)^A9

1065.26 <-- =SUM(C5:C9)

1065.26 <-- =NPV(B2,B5:B9)

A
1
COMPUTING
2 Discount rate
3

THE NET PRESENT VALUE

4
Year
5
0
6
1
7
2
8
3
9
4
10
5
11
12 Net present value
13
Summing cells C5:C10
14
Using Excel's NPV function

10%

Cash flow
-250
100
100
100
100
100

Present
value
-250.00
90.91
82.64
75.13
68.30
62.09

<-<-<-<-<-<--

=B5/(1+$B$2)^A5
=B6/(1+$B$2)^A6
=B7/(1+$B$2)^A7
=B8/(1+$B$2)^A8
=B9/(1+$B$2)^A9
=B10/(1+$B$2)^A10

129.08 <-- =SUM(C5:C10)

129.08 <-- =B5+NPV(B2,B6:B10)

A
1
2
3
4
5
6
7
8

COMPUTING THE VALUE OF A FINITE ANNUITY

Periodic payment, C
Number of future periods paid, n
Discount rate, r
Present value of annuity
Using formula
Using Excel's PV function

9
Period
10
1
11
2
12
3
13
4
14
5
15
16 Present value using Excel's NPV function

1,000
5
12%
3,604.78 <-- =B2*(1-1/(1+B4)^B3)/B4
3,604.78 <-- =PV(B4,B3,-B2)
Annuity
payment
1,000.00 <-- =B2
1,000.00
1,000.00
1,000.00
1,000.00
3,604.78 <-- =NPV(B4,B10:B14)

A
1
COMPUTING
2 Periodic payment, C
3 Discount rate, r
4 Present value of annuity

THE VALUE OF AN INFINITE ANNUITY

1,000
12%
8,333.33 <-- =B2/B3

A
1
2
3
4
5
6
7
8

COMPUTING THE VALUE OF A GROWING FINITE ANNUITY

First payment, C
Growth rate of payments, g
Number of future periods paid, n
Discount rate, r
Present value of annuity
Using formula

9
Period
10
1
11
2
12
3
13
4
14
5
15
16 Present value using Excel's NPV function

1,000
6%
5
12%
4,010.91 <-- =B2*(1-((1+B3)/(1+B5))^B4)/(B5-B3)
Annuity
payment
1,000.00
1,060.00
1,123.60
1,191.02
1,262.48

<-<-<-<-<--

=B2
=$B$2*(1+$B$3)^(A11-1)
=$B$2*(1+$B$3)^(A12-1)
=$B$2*(1+$B$3)^(A13-1)
=$B$2*(1+$B$3)^(A14-1)

4,010.91 <-- =NPV(B5,B10:B14)

A
1
2
3
4
5

COMPUTING THE VALUE OF A GROWING INFINITE ANNUITY

Periodic payment, C
Growth rate of payments, g
Discount rate, r
Present value of annuity

1,000 <-- Starting at date 1

6%
12%
16,666.67 <-- =B2/(B4-B3)

1
INTERNAL RATE OF RETURN
2 Year
Cash flow
3
0
-800
4
1
200
5
2
250
6
3
300
7
4
350
8
5
400
9
10 Internal rate of return
22.16% <-- =IRR(B3:B8)

1
INTERNAL RATE OF RETURN
2 Discount rate
12%
3
4 Year
Cash flow
5
0
-800
6
1
200
7
2
250
8
3
300
9
4
350
10
5
400
11
12 Net present value (NPV)
240.81 <-- =B5+NPV(B2,B6:B10)

1
INTERNAL RATE OF RETURN
2 Discount rate
22.16%
3
4 Year
Cash flow
5
0
-800
6
1
200
7
2
250
8
3
300
9
4
350
10
5
400
11
12 Net present value (NPV)
0.00 <-- =B5+NPV(B2,B6:B10)

INTERNAL RATE OF RETURN

1
Cash flow
2
Year
-800
3
0
4
1
200
5
2
250
6
3
300
7
4
350
8
5
400
9
10 Internal rate of return
22.00% <-- 0.22
11
12 USING THE IRR IN A LOAN TABLE

=-B3

=$B$10*B15

13

14
15
16
17
18
19
20
21
22
23
24
25
26

Year
1
2
3
4
5
6
=B15-E15

Investment at
beginning of
year
800.00
776.00
696.72
550.00
321.00
-8.38

Cash flow
at end of year
200.00
250.00
300.00
350.00
400.00

Division of cash flow

between investment
income and return of
principal

Income
176.00
170.72
153.28
121.00
70.62

The remaining investment principal

in the year after the last cash flow is
zero, indicating that all the principal
has been repaid.

Return of
principal
24.00
<-- =C15-D15
79.28
146.72
229.00
329.38

A
1
2 IRR?
3

USING A LOAN TABLE TO FIND THE IRR

15.00%
Division of cash flow
between investment
income and return of
principal

4
Principal
Cash flow
at beginning
at end of
of year
year
Year
1
1,000.00
300
2
850.00
200
3
777.50
150
4
744.13
600
5
255.74
900
6
-605.89
=$B$2*B6
=B6-E6

5
6
7
8
9
10
11
12
13
14
15
16
Year
17
0
18
1
19
2
20
3
21
4
22
5
23
24 IRR

Income
150.00
127.50
116.63
111.62
38.36

Direct calculation of IRR

Cash flow
-1,000
300
200
150
600
900
24.44% <-- =IRR(B17:B22)

Principal
150.00 <-- =C6-D6
72.50
33.38
488.38
861.64

I
1
2
3

5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24

1
2
3
4
5

USING EXCEL'S RATE FUNCTION TO

COMPUTE THE IRR
Initial investment
Periodic cash flow
Number of payments
IRR

1,000
100
30
9.307% <-- =RATE(B4,B3,-B2)

A
1
2 Discount rate
3 NPV

MULTIPLE INTERNAL RATES OF RETURN

6%
-3.99 <-- =NPV(B2,B7:B11)+B6

4
5
Year
Cash flow
6
0
-145
7
1
100
8
2
100
9
3
100
10
4
100
11
5
-275
12
13
Two IRRs
14
5.00
15
16
0.00
17
0%
10%
20%
18
-5.00
19
20
-10.00
21
Discount rate
-15.00
22
23
-20.00
24
25
-25.00
26
27
28
29 Identifying the two IRRs
30 First IRR
8.78% <-- =IRR(B6:B11,0)
31 Second IRR
26.65% <-- =IRR(B6:B11,0.3)
Net present value

30%

40%

DATA TABLE
Discount
rate
NPV
-3.99
0%
-20.00
3%
-10.51
6%
-3.99
9%
0.24
12%
2.69
15%
3.77
18%
3.80
21%
3.02
24%
1.62
27%
-0.24
30%
-2.44
33%
-4.90
36%
-7.53
39%
-10.27
Note: For a discussion of how
to create data tables in Excel
see Chapter 30.

RETURN

I
1
2
3

4
5 Table header, <-- =B3
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
: For a discussion
21 of how
eate data tables
22in Excel
23
24
25
26
27
28
29
30
31

A
1
2 Discount rate
3 NPV

MULTIPLE INTERNAL RATES OF RETURN

6%
-3.99 <-- =NPV(B2,B7:B11)+B6

4
5
Year
Cash flow
6
0
-145
7
1
100
8
2
100
9
3
100
10
4
100
11
5
-275
12
13
Two IRRs
14
5.00
15
16
0.00
17
0%
10%
20%
18
-5.00
19
20
-10.00
21
Discount rate
-15.00
22
23
-20.00
24
25
-25.00
26
27
28
29 Identifying the two IRRs
30 First IRR
8.78% <-- =IRR(B6:B11,0.1)
31 Second IRR
26.65% <-- =IRR(B6:B11,0.5)
Net present value

30%

40%

DATA TABLE
Discount
rate
NPV
-3.99
0%
-20.00
3%
-10.51
6%
-3.99
9%
0.24
12%
2.69
15%
3.77
18%
3.80
21%
3.02
24%
1.62
27%
-0.24
30%
-2.44
33%
-4.90
36%
-7.53
39%
-10.27
Note: For a discussion of how
to create data tables in Excel
see Chapter 30.

RETURN

I
1
2
3

4
5 Table header, <-- =B3
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
: For a discussion
21 of how
eate data tables
22in Excel
23
24
25
26
27
28
29
30
31

ONCE, SO THERE IS ONLY ONE IRR

=NPV(E4,B4:B11)+B3, table header
NPV of Bond Cash Flows
1200
1000

NPV

1
BOND CASH FLOWS: NPV CROSSES x-AXIS ONLY
Data table: Effect of
2
Year
Cash flow
3
0
-800
discount rate on NPV
4
1
100
1,000.00 <-5
2
100
0% 1,000.00
6
3
100
2%
786.04
7
4
100
4%
603.96
8
5
100
6%
448.39
9
6
100
8%
314.93
10
7
100
10%
200.00
11
8
1100
12%
100.65
12
14%
14.45
13 IRR
14.36% <-- =IRR(B3:B11)
16%
-60.62
14
18%
-126.21
15
20%
-183.72
16
17

800
600
400
200
0
-200 0%

5%

10%

-400
Discount rate

THERE IS ONLY
1
ONE IRR

2
3
:B11)+B3, table
4 header
5
PV of Bond Cash
6 Flows
7
8
9
10
11
12
13
15%
14
15
16rate
Discount
17

20%

A
1
2
3
4
5
6
7

8
9
10
11
12
13
14
15

FLAT PAYMENT SCHEDULES

Loan principal
Interest rate
Loan term
Annual payment

10,000
7%
6 <-- Number of years over which loan is repaid
2,097.96 <-- =PMT(B3,B4,-B2)
Split payment into:

Year
1
2
3
=C9-F9 4
5
6
7

Principal
at beginning
of year
10,000.00
8,602.04
7,106.23
5,505.70
3,793.15
1,960.71
0.00

Payment at
end of year
2,097.96
2,097.96
2,097.96
2,097.96
2,097.96
2,097.96

Interest
700.00
602.14
497.44
385.40
265.52
137.25

Return of
principal
1,397.96
1,495.82
1,600.52
1,712.56
1,832.44
1,960.71

=$B$3*C9

=D9-E9

SIMPLE FUTURE VALUE

1
2 Interest
3
Year

C
10%

Account
Interest
balance,
earned
beginning of
during year
year
1,000.00
100.00
1,100.00
110.00
1,210.00
121.00
1,331.00
133.10
1,464.10
146.41
1,610.51
161.05
1,771.56
177.16
1,948.72
194.87
2,143.59
214.36
2,357.95
235.79
2,593.74

4
5
1
6
2
7
3
8
4
9
5
10
6
11
7
12
8
13
9
14
10
15
11
16
17 A simpler way

Total in
account,
end year
1,100.00 <-- =C5+B5
1,210.00 <-- =C6+B6
1,331.00
1,464.10
=$B$2*B5
1,610.51
1,771.56
1,948.72
2,143.59
2,357.95
2,593.74
=D5

2,593.74 <-- =B5*(1+B2)^10

1
FUTURE VALUE WITH ANNUAL DEPOSITS
2 Interest
10%
3 Annual deposit
1,000 <-- Made today and at beginning of each of next 9 years
4 Number of deposits
10
5
Account
Deposit at
Interest
Total in
balance,
Year
beginning
earned
account,
beginning of
of year
during year
end year
6
year
7
1
0.00
1,000
100.00
1,100.00 <-- =D7+C7+B7
8
2
1,100.00
1,000
210.00
2,310.00 <-- =D8+C8+B8
9
3
2,310.00
1,000
331.00
3,641.00
10
4
3,641.00
1,000
464.10
5,105.10
=$B$2*(B7+C7)
11
5
5,105.10
1,000
610.51
6,715.61
12
6
6,715.61
1,000
771.56
8,487.17
13
7
8,487.17
1,000
948.72
10,435.89
14
8
10,435.89
1,000
1,143.59
12,579.48
15
9
12,579.48
1,000
1,357.95
14,937.42
16
10
14,937.42
1,000
1,593.74
17,531.17
17
=E7
18 Future value
17,531.17 <-- =FV(B2,B4,-B3,,1)
19

A
1
2 Interest
3 Annual deposit
4 Annual retirement withdrawal
5
Year
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

21

1
2
3
4
5
6
7
8
9
10
11
12
13

A RETIREMENT PROBLEM
8%
48,000.00
30,000.00
Account
Deposit at
Interest
balance,
beginning
earned
beginning
of year
during year
of year
0.00
48,000.00
3,840.00
51,840.00
48,000.00
7,987.20
107,827.20
48,000.00
12,466.18
168,293.38
48,000.00
17,303.47
233,596.85
48,000.00
22,527.75
304,124.59 -30,000.00
21,929.97
296,054.56 -30,000.00
21,284.36
287,338.93 -30,000.00
20,587.11
277,926.04 -30,000.00
19,834.08
267,760.12 -30,000.00
19,020.81
256,780.93 -30,000.00
18,142.47
244,923.41 -30,000.00
17,193.87
232,117.28 -30,000.00
16,169.38

Total in
account,
end year
51,840.00
107,827.20
168,293.38
233,596.85
304,124.59
296,054.56
287,338.93
277,926.04
267,760.12
256,780.93
244,923.41
232,117.28
218,286.66

Note: This problem has 5 deposits and 8 annual withdrawals, all made at the beginning of the year. The
beginning of year 13 is the last year of the retirement plan; if the annual deposit is correctly computed, the
balance at the beginning of year 13 after the withdrawal should be zero.

EM

F
1
2
3
4
5

=$B$2*(C7+B7)

6
7 <-- =D7+C7+B7
8
9
10
11
12
13
14
15
16
17
18
19
20

ade at the beginning of the year. The

ual deposit is correctly computed, the
awal should be21
zero.

A
1
2 Interest
3 Annual deposit
4 Annual retirement withdrawal
5
Year
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

21

1
2
3
4
5
6
7
8
9
10
11
12
13

A RETIREMENT PROBLEM
8%
29,386.55
30,000.00
Account
Deposit at
Interest
balance,
beginning
earned
beginning
of year
during year
of year
0.00
29,386.55
2,350.92
31,737.48
29,386.55
4,889.92
66,013.95
29,386.55
7,632.04
103,032.54
29,386.55
10,593.53
143,012.62
29,386.55
13,791.93
186,191.10 -30,000.00
12,495.29
168,686.39 -30,000.00
11,094.91
149,781.30 -30,000.00
9,582.50
129,363.81 -30,000.00
7,949.10
107,312.91 -30,000.00
6,185.03
83,497.94 -30,000.00
4,279.84
57,777.78 -30,000.00
2,222.22
30,000.00 -30,000.00
0.00

Total in
account,
end year
31,737.48
66,013.95
103,032.54
143,012.62
186,191.10
168,686.39
149,781.30
129,363.81
107,312.91
83,497.94
57,777.78
30,000.00
0.00

Note: This problem has 4 deposits and 8 annual withdrawals, all made at the beginning of the year. This
means that the beginning of year 13 is the last year of the retirement plan; if the annual deposit is correctly
computed, the balance at the beginnin

EM

F
1
2
3
4
5

=$B$2*(C7+B7)

6
7 <-- =D7+C7+B7
8
9
10
11
12
13
14
15
16
17
18
19
20

de at the beginning of the year. This

plan; if the annual deposit is correctly
nnin
21

A RETIREMENT PROBLEM
1
2
3
4
5
6
7
8

Solution using formulas

Interest
Annual deposit
Annual retirement withdrawal
Numerator
Denominator
Annual deposit

8%
48,000.00
30,000.00
126,718.54 <-- =1/(1+B2)^4*PV(B2,8,-B4)
4.31 <-- =PV(B2,5,-1,,1)
29,386.55 <-- =B6/B7

Annual deposit
Annual withdrawal
Interest rate

29,386.55
30,000.00
8%
0

Deposits made
Future value of deposits
Present value of
withdrawals
to end of year 3

With
$186,191.10 <-- =FV(B4,5,-B2,,1)

$186,191.10 <-- =PV(B4,8,-B3,,1)

10

Withdrawals at beginning of year

11

12

13

24
25
26
27
28
29
30
31
32
33

MULTIPLE COMPOUNDING PERIODS

Initial deposit
Interest rate
Number of compounding periods per year
Interest per compounding period
Accretion in one year
Continuous compounding with Exp

1,000
5%
2
2.500% <-- =B3/B4
1,050.625 <-- =B2*(1+B5)^B4
1,051.271 <-- =B2*EXP(B3)

Effect of Multiple Compounding Periods

1,051.40
1,051.20
End-year accretion

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23

1,051.00
1,050.80
1,050.60
1,050.40
1,050.20
1,050.00

Number of compounding intervals

1,049.80
1

Compounding periods per year

1
2
10
20
50
100
150
300
800

10

100

1000

End-year
accretion
1,050.000 <-- =$B$2*(1+$B$3/A25)^A25
1,050.625 <-- =$B$2*(1+$B$3/A26)^A26
1,051.140
1,051.206
1,051.245
1,051.258
1,051.262
1,051.267
1,051.269

A
1
2 Interest
3

CONTINUOUS DISCOUNTING
8%

4
Year
Cash flow
5
1
100
6
2
200
7
3
300
8
4
400
9
5
500
10
11 Present value

Continously
discounted
PV
92.31 <-- =B5*EXP(-$B$2*A5)
170.43 <-- =B6*EXP(-$B$2*A6)
235.99
290.46
335.16
1,124.35 <-- =SUM(C5:C9)

A
1
2
3
4
5
6
7
8

CALCULATING RETURNS FROM PRICES

Initial deposit
End-of-year value
Number of compounding periods
Implied annual interest rate

1,000
1,200
2
19.09% <-- =((B3/B2)^(1/B4)-1)*B4

Continuous return

18.23% <-- =LN(B3/B2)

9 Implied annual interest rate

10 Number of compounding periods
11
12
1
13
2
14
4
15
8
16
20
17
1000

with n compounding periods

Rate
19.09% <-- =B5, data table header
20.00%
19.09%
18.65%
18.44%
18.32%
18.23%

USING XIRR TO COMPUTE THE

ANNUALIZED INTERNAL RATE OF
RETURN

1
2
Date
3
1-Jan-06
4
3-Mar-06
5
4-Jul-06
6
12-Oct-06
7
25-Dec-06
8
9 IRR

Cash flow
-1,000
150
100
50
1,000
37.19% <-- =XIRR(B3:B7,A3:A7)

USING XNPV TO COMPUTE THE NET

PRESENT VALUE

1
2 Annual discount rate
3
4
Date
5
1-Jan-06
6
3-Mar-07
7
4-Jul-07
8
12-Oct-08
9
25-Dec-09
10
11 Net present value
12

12%
Cash flow
-1,000
100
195
350
800
16.80 <-- =XNPV(B2,B5:B9,A5:A9)

Note that XNPV has a different syntax from NPV !

XNPV requires all the cash flows, including the initial cash flow,
whereas NPV assumes that the first cash flow occurs one period
13 hence.