EXCEL 2016 CASE STUDY

FINANCIAL FORMULAS CASE

STUDY
Excel Case Study

Finacial Formulas: Case Study

In this case study, you will use common Financial functions to analyze an investment
opportunity for a business.

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Excel Case Study

Description
Saurabh is the owner of a small scale manufacturing company. He is planning to invest in a
new machine that will double the production at his factory. The investment in machinery will
cost him Rs.500,000. He is negotiating with two banks for a loan. The table below gives
details of the two loan offers he has:

  Loan from Bank A Loan from Bank B

Loan Amount ₹ 5,00,000.00 ₹ 5,00,000.00
Loan Duration in Months 48 60
Annual Interest Rate 10% 12%

The Table below shows the investment plan. The project requires Rs.500,000 investment.
The increased production will result in increased sales and profit over the next 5 years as
given below:

Cash Flow From Investment in New Machinery

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
₹ -5,00,000.00 ₹ 1,40,000.00 ₹ 1,40,000.00 ₹ 1,60,000.00 ₹ 1,80,000.00 ₹ 2,00,000.00

The negative (Red) cash flow in Year 0 indicates the initial investment in the project. The
positive cash flows in Years 1-5 are the annual returns from the project in each of these
years.

Saurabh needs to decide:

 Which loan offer he should accept

 Which loan he will be able to serve using the cash generated from the investment

We will use financial functions in Excel to help Saurabh make this decision.

Solution
Follow the steps to complete the case study: Open file Financial Formulas Case
Study.xlsx

1. To decide which loan is better, we need to calculate the internal rate of return (IRR)
of the investment and compare it to the cost of two loan options (interest rate). The
IRR of the investment must be more than the interest rate on the loan for the project
to be viable. We will use the IRR function to calculate it.
Select cell F5.
Type =IRR(E3:J3) since the cell range E3:J3 contains the cash flows from the
project. Press Enter.

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Excel Case Study

Cell F5 now displays the IRR of the project or investment as 18%. Since it is more
than the interest rate charged by both the banks, Saurabh can fund it with either of
these loan options.
2. However, he needs to ensure that the loan can be repaid using the cash flow from
the new investment. So we need to calculate the annual loan repayment for both loan
options and see which one can be repaid with returns from this investment. We will
use the PMT function to calculate the monthly EMI for both loan options and multiply
it by 12 to get the annual payments.
Select cell B6.
Type =PMT(B4/12,B3,B2). The first argument, Rate, is calculated by dividing the
annual interest rate in cell B4 by 12 since the loan is repaid every month.
Press Enter.
Cell B6 now displays the EMI for loan from Bank A.
Copy cell B6 and paste in cell C6 to calculate the EMI for loan from Bank B.

3. Select Cell B7.

Type =B6*12 to calculate the annual payment for loan from Bank A.
4. Select Cell C7.
Type =C6*12 to calculate the annual payment for loan from Bank B.
You can see that the loan from Bank A requires ₹ -1,52,175.50 to be repaid every
year while loan from Bank B requires ₹ -1,33,466.69 to be repaid.

However, cash flow from the investment is only Rs.1,40,000 in the first two years.
This is not enough to repay the loan from Bank A but is enough to repay loan from
Bank B. Therefore, Saurabh should borrow from Bank B.

Solution File: Financial Formulas Case Study_Solution.xlsx

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