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Compound Interest
I want to take a loan of Rs 1 lakh to buy a used car. How much will the car cost me at an annual interest rate of 8 per cent for four years? The compound interest formula can be used here to calculate the final cost, which would include the loan amount and the interest paid. The amount that is actually paid for Rs 1 lakh is Rs 1,36,048.90. The total amount of interest charged for borrowing Rs 1 lakh is Rs 36,048.90.
Compound annualised growth rate (CAGR) will be used here to calculate the growth over a period of time. The gain of Rs 50 over five years on the initial NAV of Rs 20 is a simple return of 250 per cent (50/20 * 100). However, it should not be construed as 50 per cent average return over five years.
In the excel page type Rs 18,572 as a negative figure (-18572), as it is an outflow, in the first cell. Paste the same figure till the twentieth cell. Then, as every fifth year has an inflow of Rs 40,000, type in Rs 21,428 (40,000-18,572) in every fifth cell. In the twentieth cell, type in 18572. In the twenty first cell, type in Rs 4,50,000, which is the maturity value of the policy. Then click on the cell below it and type: = IRR(A1:A21) and hit enter. 5.28% will show in the cell. This is your internal rate of return. Also used for: Calculating returns on insurance endowment policies.
XIRR
I bought 500 shares on 1 January 2007 at Rs 220, 100 shares on 10 January at Rs 185 and 50 shares at Rs 165 on 18 May 2008. On 21 June 2008, I sold off all the 650 shares at Rs 655. What is the return on my investment?
XIRR is used to determine the IRR when the outflows and inflows are at different periods. Calculation is similar to IRRs. Transaction date is mentioned on the left of the transaction. How to do it in Excel In an excel sheet type out the data from the top most cell with dates in one column say (A1 to A4) and amount with ve figures say column (B1 to B4) . Outflows figures are in negative and inflows in positive. In the cell with the last figure 4,25,750, type out =XIRR (B1:B4,A1:A4) *100 hit enter. The cell will show 122.95%, the total return on investment.
Also used for: Calculating MF returns, especially SIP, or that for unit-linked insurance plans.
Also used for: Calculating the yield on an Employees Provident Fund or any other tax-free instruments.
Inflation
My familys monthly expense is Rs 50,000. At an inflation rate of 5 per cent, how much will I need 20 years hence with the same expenses? The required amount can be calculated using the standard future value formula. Inflation means that over a period of time, you need more money to fund the same expense.
Type in: =50000*(1+5% or .05)^20 and hit enter. You will get Rs 1,32,664 as the answer, which is the required amount. Also used for: Calculating maturity value on an investment
Purchasing Power
My familys monthly expense is Rs 50,000. At an inflation rate of 5 per cent, how much will be the purchasing value of that amount after 20 years?
Inflation increases the amount you need to spend to fetch the same article and in a way reduces the purchasing power of the rupee. Here, Rs 50,000 after 20 years at an inflation of 5 per cent will be able to buy goods worth Rs 18,844 only.
Type in: =50000/(1+5% )^20 and hit enter. You will get Rs 18,844, which is the reduced amount
It is true that fixed deposit is safe and gives assured returns. However, after adjusting for inflation, the real rate of return can be negative.
Type in: =((1+9%)/(1+ 11%)-1)*100 and hit enter. -1.8% is the real rate of return. ROR: Rate of return per annum; i: rate of inflation (11 per cent here)
Formula:
No. of years to double = 72/expected return Type in: =72/12 and hit enter. You will get 6 years. For tripling, type in: =114/12 and hit enter. You will get 9.5 years. For quadrupling, type in: =144/12 and hit enter to get 12 years.