MICROSOFT EXCEL FINANCIAL FUNCTIONS

A BRIEF TUTORIAL
There are several ways to perform the computations necessary to answer the problems at the end of chapter 7. My
choice would be to use Microsoft Excel, due to its power, flexibility and ubiquity. From among the many built-in
financial functions Excel provides, you may find the following particularly helpful. (To access these functions,
select Formulas > Financial > and choose the desired formula.)
=PV(rate, nper, pmt, fv, type) returns the present value of a series of cash flows.
=FV(rate, nper, pmt, pv, type) returns the future value of a series of cash flows.
=PMT(rate, nper, pv, fv, type) calculates the periodic payment for a loan based on constant payments and a
constant interest rate.
=NPER(rate, pmt, pv, fv, type) returns the number of periods for an investment based on periodic, constant
payments and a constant interest rate.
=NPV(rate, value1, value2) returns the net present value of an investment based on a discount rate and a
series of future payments (negative values) and income (positive values).
(Warning: By convention, NPV calculates the net present value one period before the first
cash flow.)
=IRR(values, guess) values is an array or reference to cells that contain numbers for which you want to
calculate the internal rate of return.
In these functions,
rate = the discount, or interest rate.
nper = number of periods.
pmt = annual uniform payment.
fv = future value, or future cash flow.
type is a logical value allowing you to specify if cash flows occur at the end or the beginning of the period.
A value of 1 indicates beginning of period, 0 or omitted indicates end of period.
pv = present value.
value1, value2 = up to 254 numbers representing a stream of cash inflow and outflows appearing in
chronological order. For example, if the cash flows are in the first 10 rows of column A, the entry
would be A1:A10.
guess = your guess as to the internal rate of return. This helps the computer get started and may be left
blank.
An example Suppose you want to know the present value of $100 per year for 19 years and $500 at the end of the
19th year when the interest rate is 13 percent.
Select a spreadsheet cell and enter =PV(0.13,19,100,500). Excel will return ($742.83). This is the
amount one should be willing to pay today to receive the indicated stream of cash flows when the
interest rate is 13 percent.