Exercise-5 Using PMT (Payment function) PMT (payment) function is used to calculate Loan payment: Syntax:

=PMT(rate,nper,pv,fv,type)

Where,

Rate is the interest rate for the loan. Nper is the total number of payments for the loan (number of months) Pv is the present value; also known as the principal. Fv is the future value, or a cash balance you want to attain after the last payment is made. If fv is omitted, it is assumed to be 0 (zero); that is, the future value of a loan is 0. Type is the number 0 (zero) or 1 and indicates when payments are due. 0 = at the end of the period (at the end of month/year) 1 = at the beginning of the period (at the beginning of the month/year)

**** note that rate and nper , both needs to be in monthly unit. Eg, if the rate=8% per annum and nper=30 months, then rate needs to converted to monthly interest rate by dividing by 12.

Example: 1. a) You want to buy a BMW worth $80000. Interest rate is 9% p.a. If you choose a loan payment period of 45 months calculate monthly installments.

b) If you choose to repay the loan at the beginning of each month calculate monthly installment. Solution: see Excel file Exercise-5 Solution.xls.

Molla E Majid, School of Business, NSU

Now solve the following problems in the same file: 2. You want to buy a flat worth TK1,20,00000. If the bank interest rate is 12% p.a. calculate monthly installment in order to pay off the loan in 25 years. 3. a) Calculate monthly repayment of a loan of TK 10,00000 taken over a period of 52 months at 11.5% annual interest rate. b) Recalculate the loan amount if you choose to repay the loan at the beginning of each month

Goal Seek Goal seek solves formulas backward. Use Goal seek when you know the result you want but need to determine how much to change a single input to get that result. Problem 4 You want to take out a loan to buy a car. The interest rate for the Bank loan is 7% annually. Maximum payment you can afford is $300/month. The loan requires 20% down payment. What is the most expensive car you can afford if the repayment period is 2 years? Solution: To use goal seek enter the above data into an excel sheet as shown below. Cell B4 will return a zero value.

Molla E Majid, School of Business, NSU

Now, Select cell B4 (that contains the formula) and choose Data>What if analysis>goal seek The following Goal Seek window will appear Enter B4 in the Set Cell box. (because this cell contains the repayment formula) Enter To Value to -300 (this is the repayment amount and so a negative value) Enter B3 in By changing cell box as shown in the following figure. (as this cell will show you the result)

Click Ok. The following result will come up:

Molla E Majid, School of Business, NSU

The amount shown 6700.53 is just the loan amount that you can afford which is just 80% of the Price; the rest 20% needs to be paid as down payment). In order to calculate the Car price you need to use the following mathematical formula: Price of the Car = Loan / 80% = 6700.53/0.8 = 8375.66 Perform the above calculation in the same sheet as shown below

Molla E Majid, School of Business, NSU

Problem 5: You want to purchase a Sony Bravia LCD TV. The condition is you have to make a 30% down payment. The maximum amount you can afford as monthly installment is Tk 6000. Annual interest rate is 8.5% pa. What would be the price of the TV if you want to pay off the balance in 2 years?

Molla E Majid, School of Business, NSU