Ross, Westerfield, Jaffe, and Jordan's Spreadsheet Master

Corporate Finance, 13th edition

by Brad Jordan and Joe Smolira
Version 13.0

Chapter 5
In these spreadsheets, you will learn how to use the following Excel fu

NPV
XNPV
AND
ABS
MAX
COUNTIF
IRR
XIRR
MIRR

The following conventions are used in these spreadsheets:

1) Given data in blue

2) Calculations in red

NOTE: Some functions used in these spreadsheets may require that

the "Analysis ToolPak" or "Solver Add-In" be installed in Excel.
To install these, click on the File tab
then "Excel Options," "Add-Ins" and select
"Go." Check "Analysis ToolPak" and
"Solver Add-In," then click "OK."
 the following Excel functions:

eadsheets:

equire that
 Chapter 5 - Section 1
Why Use Net Present Value?

We previously used the net present value function to find the present value of unequal cash flows. Now, you know e
of all outflows, plus the present value of all inflows. Unfortunately, as we will see, computer programmers don't und

Suppose we have a project with the following cash flows and required return. What is the NPV of the project?

t Cash flow
0 $ (30,000)
1 8,000
2 10,000
3 11,000
4 17,000
5 12,000

Return 12%

NPV $ 10,557.31

RWJ Excel Tip

To calculate the NPV of the project using the NPV function, we entered the following:
Notice one very important thing: We did not include the cash flow at Time 0 in the NPV function. The reason is simp
they did not truly create a function that calculated the NPV, but rather created a function that calculated the presen
of cash flows, we use the NPV function to calculate the present value of the cash flows beyond Time 0, then add the
this, go to the NPV cell above.

NPV and Cash Flows at Irregular Intervals

The NPV function does not really calculate the NPV of a set of cash flows, and it also has a potential problem in that
flows occur at regular intervals. If the cash flows occur at irregular intervals, we need to use the XNPV function. The
date for each cash flow. Suppose we have the following set of cash flows and required return. What is the NPV of th

t Cash flow
2/23/2021 $ (50,000)
8/24/2021 14,000
3/5/2022 8,000
11/2/2022 23,000
6/5/2023 18,000
12/18/2023 19,000

Return 11%

NPV $ 18,107.66

RWJ Excel Tip

To calculate the NPV of the project using the XNPV function, we entered the following:

With the XNPV function, you need to include the first cash flow. The NPV of the cash flows will be on the date of the
unequal cash flows. Now, you know exactly what net present value means: The present value
ee, computer programmers don't understand net present value.

What is the NPV of the project?

owing:
 the NPV function. The reason is simple. When the programmers created the NPV function,
a function that calculated the present value of cash flows. So, to calculate the NPV of a series
sh flows beyond Time 0, then add the cash flow at Time 0 to the result. To see how we did

t also has a potential problem in that the implicit assumption used by Excel is that the cash
e need to use the XNPV function. The XNPV function has an additional argument, namely the
equired return. What is the NPV of the cash flows?

llowing:

e cash flows will be on the date of the first cash flow.

 Chapter 5 - Section 2
The Payback Period Method

The payback rule is the simplest capital budgeting technique, but, unfortunately, Excel has no function to directly ca
payback period, we need to program Excel to calculate it. We will show you three ways to do this.

Suppose we have a project with the following cash flows. What is the payback period for the project? Should the pro

t Cash flow
0 $ (30,000)
1 8,000
2 10,000
3 11,000
4 17,000
5 12,000

Maximum payback (years) 3

In the first method, we will calculate the cumulative cash flows for the project by adding the cash flows each year as

Cumulative
t cash flow
0 $ (30,000)
1 (22,000)
2 (12,000)
3 (1,000)
4 16,000
5 28,000

Next, we will calculate the payback period as a fractional number of years. We know that the payback period will oc
become positive. So, we need to test each year to determine if the cumulative cash flows for the previous year were
year are positive. To do this, we will use a nested function. The IF function will allow us to test this, but the IF functio
flows, we will insert an AND function in the IF function. In the following statement, the result will be zero if the cond

Payback
t calculation
0
1 0.000
2 0.000
3 0.000
 4 3.059
5 0.000

RWJ Excel Tip

In the calculation of the payback period, we used two new functions, AND and ABS. AND is a logical test that returns
value if the arguments are false. Excel will allow you to simultaneously test up to 255 conditions with the AND functi
a number. Since we are dividing the negative cumulative cash flow from the previous year by the positive cash flow
get a negative answer. ABS makes sure that the calculation returns a positive value. Of course, since we know the cu
negative, we could have inserted a negative sign in front of this cell reference as well.

Now, rather than looking through the payback calculation, we would like a cell that shows the payback period for th
should accept the project or reject it according to the payback rule. Of course, the payback period could also be nev
the decision on the project are:

Payback period for project 3.06

Accept or reject? Reject

RWJ Excel Tip

Since the payback calculation only has one value greater than zero, we used the MAX function to return the maximu
more values and returns only the maximum value found in that range of numbers. We nested the MAX function in a
calculation column is zero, then the project has no payback period, so the logical test will return "Never." The accep
period for the project is less than the required payback, it will return "Accept" and if the payback period for the proj
will return "Reject."

While the previous method accurately calculates the payback period, it is a little messy in that there are two interm
Although Albert Einstein argued that elegance is for tailors, we like a little elegance in our spreadsheets. We can use
single cell, although we should warn you that the equation is not for the faint of heart. First, we test to make sure th
from the end of the cash flows to the beginning, calculating longer payback periods first. You could test for shorter p
statement is:

Payback period for project 3.06

Accept or reject? Reject

RWJ Excel Tip

When using nested IF statements, you can include up to 64 IF statements in a single nested statement.

Since we have already argued for elegance when using Excel, we have another method to calculate the payback per
cumulative cash flow column, the number of negative cash flows in the cumulative cash flows is the number of year
can count the number of negative cash flows in the cumulative cash flow column. The fractional part of the payback
negative year divided by the amount the project will make in that next year. With this, the payback period is:
 Cumulative
t Cash flow cash flow
0 $ (30,000)
1 8,000 $ (22,000)
2 10,000 (12,000)
3 11,000 (1,000)
4 17,000 16,000
5 12,000 28,000

Payback period for project 3.06

Accept or reject? Reject

Let's talk about COUNTIF, then discuss the logic of the functions we used.

RWJ Excel Tip

The COUNTIF function is a combination of the COUNT function and the IF function. As you would expect, the COUNT
selected array. The COUNTIF function first tests if a condition is true for each cell, then counts the number of cells in
COUNTIF function to count the number of negative cells.

In our equation, we first tested for the case in which the payback period is never. Next, we tested for the unusual ca
Since we are going to count only the cumulative cash flows, we need a special function in case the payback period is
equation. We used a COUNTIF function to count the number of cumulative cash flows that are negative. This gives u
used the VLOOKUP function to find the last negative cumulative cash flow. This is the numerator to determine the fr
need to add the calculation to the whole number, but since the cumulative cash flow will be less than zero, we subt
negative of a negative is a positive.) In the denominator, we used a COUNTIF function nested inside a VLOOKUP func
of negative cumulative cash flows, then we added one in order to get to the next year's cash inflow. The VLOOKUP f
column, which is the cash inflow in that year. So, which one of these payback calculations is the best? They are all eq
almost always more than one way to calculate an answer correctly.
ly, Excel has no function to directly calculate the payback period. In order to calculate the
ree ways to do this.

period for the project? Should the project be accepted?

by adding the cash flows each year as follows:

know that the payback period will occur during the first year that the cumulative cash flows
cash flows for the previous year were negative and the cumulative cash flows for the current
allow us to test this, but the IF function will perform only one logical test. To test both cash
ent, the result will be zero if the conditions are not met.
 ABS. AND is a logical test that returns a value if one or more arguments are true and another
to 255 conditions with the AND function. The ABS value function returns the absolute value of
evious year by the positive cash flow that will occur during the current year, we will always
alue. Of course, since we know the cumulative cash flow from the previous year will be
as well.

that shows the payback period for the project, as well as a cell that tells us whether we
the payback period could also be never so we include this possibility. The payback period and

e MAX function to return the maximum value in the array. The MAX function tests two or
ers. We nested the MAX function in an IF statement. If the maximum value of the payback
al test will return "Never." The accept/reject cell is a simple IF statement. If the payback
and if the payback period for the project is greater than the required payback, the function

e messy in that there are two intermediate calculations required for the final calculation.
ance in our spreadsheets. We can use a nested IF function to calculate the payback period in a
of heart. First, we test to make sure that the project does have a payback period, then we test
riods first. You could test for shorter payback periods first if you want. The nested IF

single nested statement.

method to calculate the payback period. Here is the logic behind this method: If we create a
ative cash flows is the number of years (plus the fractional year) for the payback period. So, we
mn. The fractional part of the payback period is the amount the project is short in the last
ith this, the payback period is:
tion. As you would expect, the COUNT function returns the total number of objects in the
ell, then counts the number of cells in which the condition is true. In this case, we used the

er. Next, we tested for the unusual case in which the payback period is less than one year.
function in case the payback period is less than one year. Now we get to the heart of the
h flows that are negative. This gives us the whole number for the payback period. We then
s is the numerator to determine the fractional number of years for the payback period. We
h flow will be less than zero, we subtracted it. (Actually, we used the ABS function since a
unction nested inside a VLOOKUP function. The COUNTIF function will again count the number
ext year's cash inflow. The VLOOKUP function will then return the value from the second
alculations is the best? They are all equally correct. In Excel, as in Finance in general, there is
 Chapter 5 - Section 3
The Discounted Payback Period Method

The discounted payback period is similar to the payback rule except that we use the discounted cash flows in the ca

Suppose we have a project with the following cash flows and required return. What is the payback period for the pr

t Cash flow
0 $ (30,000)
1 8,000
2 10,000
3 11,000
4 17,000
5 12,000

Required return 10%

Maximum payback (years) 3.5

Discounted
t cash flow
0 $ (30,000.00)
1 7,272.73
2 8,264.46
3 8,264.46
4 11,611.23
5 7,451.06

We will use the same three methods we previously utilized to calculate the payback period. The first calculation is:

Cumulative
discounted
t cash flow
0 $ (30,000.00)
1 (22,727.27)
2 (14,462.81)
3 (6,198.35)
4 5,412.88
5 12,863.94

Next, we will calculate the discounted payback period as a fractional number of years, which is:
 Payback
t calculation
0
1 0.000
2 0.000
3 0.000
4 3.534
5 0.000

And the discounted payback in a specific cell with the accept/reject decision is:

Discounted payback period 3.53

Accept or reject? Reject

Our "elegant" equation for calculating the discounted payback period is:

Discounted payback period 3.53

Accept or reject? Reject

And, using our most elegant equation, the discounted payback is:

Cumulative
Discounted discounted
t cash flows cash flows
0 $ (30,000.00)
1 7,272.73 $ (22,727.27)
2 8,264.46 (14,462.81)
3 8,264.46 (6,198.35)
4 11,611.23 5,412.88
5 7,451.06 12,863.94

Discounted payback period 3.53

Accept or reject? Reject
e the discounted cash flows in the calculation.

What is the payback period for the project?

yback period. The first calculation is:

f years, which is:

:
 Chapter 5 - Section 4
The Internal Rate of Return

The internal rate of return (IRR) is the rate of return for a series of cash flows that results in a zero NPV. Excel's IRR f

What is the IRR for the project with the following cash flows?

t Cash flow
0 $ (30,000)
1 8,000
2 10,000
3 11,000
4 17,000
5 12,000

IRR 24.01%

RWJ Excel Tip

To use the IRR function, we entered the following:

Notice that we need to include the first cash flow in the Values argument for IRR. We left the Guess argument blank
interest rate until it finds an interest rate that generates a zero NPV. If you enter a starting value for the Guess argum
general, it is unnecessary to enter a value for this argument, although as we will see later, when you want to find m

IRR and Cash Flows at Irregular Intervals

Suppose you have cash flows that occur at irregular intervals. The standard IRR function assumes that cash flows occ
XIRR function. Suppose you have the following set of cash flows. What is the IRR?

t Cash flow
2/23/2021 $ (50,000)
8/24/2021 14,000
3/5/2022 8,000
11/2/2022 23,000
6/5/2026 18,000
12/18/2026 19,000

IRR 19.76%

RWJ Excel Tip

To calculate the IRR of the project using the XIRR function, we entered the following:

As with the IRR function, Guess is an argument that will make Excel begin its calculations at the value entered.

NPV Profile

The NPV profile is a graphical representation of the NPV of a project for different interest rates. We will graph the N

t Cash flow
0 $ (30,000)
1 8,000
2 10,000
3 11,000
 4 17,000
5 12,000

To construct the NPV profile, we will first need a table with the project's NPV at different interest rates:

Return NPV
0% $ 28,000.00
5% 19,579.81
10% 12,863.94
15% 7,436.56
20% 2,997.69
25% (672.64)
30% (3,738.05)
35% (6,321.92)
40% (8,518.47)

NPV Profile
$35,000

$30,000

$25,000

$20,000

$15,000 IRR
NPV

$10,000

$5,000 NPV >

0
$-
0% 5% 10% 15% 20% 25% 30%
$(5,000)

$(10,000)

$(15,000)
Interest Rate

All projects with conventional cash flows will have a downward sloping NPV profile similar to this.
hat results in a zero NPV. Excel's IRR function easily computes the IRR for a series of cash flows.

R. We left the Guess argument blank. Excel uses an algorithm to repeatedly change the
r a starting value for the Guess argument, Excel will begin its calculations at that value. In
l see later, when you want to find multiple IRRs, the Guess argument can be useful.
function assumes that cash flows occur at regular intervals. In this case, we need to use the
R?

wing:

lculations at the value entered.

nt interest rates. We will graph the NPV profile of the following project:
t different interest rates:

rofile

IRR

NPV <
0

20% 25% 30% 35% 40%

est Rate

ofile similar to this.

 Chapter 5 - Section 5
Problems with the IRR Approach

Problem 1: Investing or Financing?

The use of the IRR decision rule becomes problematic when the cash flows resemble a loan. Consider the following

t Cash flow
0 $ 25,000
1 (10,000)
2 (11,000)
3 (12,000)

The IRR of this project is:

IRR 14.77%

The IRR decision rule implies that we should accept projects when the IRR is greater than the required return. So, th
than the IRR. However, the NPV profile for the project looks like this:

Return NPV
0% $ (8,000.00)
5% (4,867.18)
10% (2,197.60)
15% 96.57
20% 2,083.33
25% 3,816.00
30% 5,336.82

NPV Profile
$8,000.00

$6,000.00

$4,000.00
IRR
NPV > 0
$2,000.00

$-
0% 5% 10% 15% 20% 25%
$(2,000.00) NPV <
0
$(4,000.00)
 IRR
NPV > 0
$2,000.00

$-
0% 5% 10% 15% 20% 25%
$(2,000.00) NPV <
0
$(4,000.00)

$(6,000.00)

$(8,000.00)

$(10,000.00)

With loan-type cash flows, the NPV increases as the interest rate increases. The standard IRR decision rule cannot b

Problem 2: Multiple Rates of Return

Excel uses an algorithm to calculate the IRR of a set of cash flows. Because the algorithm always starts at the same p
is not a problem, but with multiple IRRs we may want to find both IRRs. In this case, we can use the Guess argument
following set of cash flows:

t Cash flow
0 $ (50,000)
1 25,000
2 29,000
3 41,000
4 32,000
5 (35,000)

We would expect two IRRs. Using the IRR function without using the Guess argument, we find:

IRR 39.13%

Now we will use the Guess argument to find what the other IRR is:

IRR -44.59%

RWJ Excel Tip

In the second IRR cell, we entered:
We entered -.99 (or -99%) as the starting point for Excel. Why did we enter -99%? It was a guess! But, it also is a lon
Excel had returned the same IRR, we would have tried 99% next.

We can graph the NPV profile for this project as well. The NPV profile will look like this:

Return NPV
-50% $ (164,000.00)
-45% (7,975.42) NPV Profile with Multiple I
-40% 58,847.74 $150,000
-35% 84,011.95
-30% 89,462.72
-25% 85,720.16 $100,000
-20% 77,954.10
-15% 68,732.59
$50,000
-10% 59,321.92
-5% 50,324.30
Net Present Value

0% 42,000.00 $-
5% 34,433.78 -50% -40% -30% -20% -10% 0% 10%
10% 27,622.31
15% 21,520.38 $(50,000)
20% 16,065.46
IRR
25% 11,190.40
$(100,000)
30% 6,829.92
35% 2,923.56
40% (583.09) $(150,000)
45% (3,738.29)
50% (6,584.36)
55% (9,158.27) $(200,000)
60% (11,492.16) Interest rate

The Modified Internal Rate of Return (MIRR)

Excel does have a built-in function to calculate the MIRR, but we work through the MIRR calculation for each metho
following cash flows, reinvestment rate, and discount rate:

t Cash flow
0 $ (12,000)
1 5,800
2 6,500
3 6,200
4 5,100
5 (4,300)

Discount rate 11%

Reinvestment rate 8%

With the discounting approach, we discount all negative cash flows to the beginning of the project. In order to have
statement for each cash flow as follows. Notice that the equation at Time 0 is not a nested IF, but a series of IF state
if the cash flow is negative, otherwise it returns a value of 0 to be added in to the cash flow. Once we get these mod
flows.

Discounting approach:
t Cash flow
0 $ (14,551.84)
1 5,800.00
2 6,500.00
3 6,200.00
4 5,100.00
5 -

MIRR 23.08%

With the reinvestment approach, we find the future value of all cash flows except the cash flow at Time 0 at the end
remaining cash flows. Doing so, we find that the MIRR using the reinvestment approach is:

Reinvestment approach:
t Cash flow
0 $ (12,000.00)
1 -
2 -
3 -
4 -
5 24,518.64

MIRR 15.36%
We should note that to have Excel accurately calculate the IRR of these modified cash flows, the intermediate cash fl

For the combination approach, we need to find the present value of all negative cash flows at Time 0, the future val
then find the IRR of the modified cash flows. Again, we can use a series of IF statements to test whether each cash fl
combination approach is:

Combination approach:
t Cash flow
0 $ (14,551.84)
1 -
2 -
3 -
4 -
5 28,818.64

MIRR 14.64%

As we mentioned earlier, Excel does have a built-in MIRR function. Using the MIRR function, the MIRR is:

MIRR 14.64%

What method is Excel using to calculate the MIRR? Of course, remember that Excel was written by computer progra
more correct, just the method the programmers selected.

RWJ Excel Tip

To use the MIRR function, we entered the following:
The Values are the cash flows, the Finance_rate is the discount rate, and the Reinvest_rate is the reinvestment rate.

Mutually Exclusive Investments and Incremental IRR

Even when there is a single IRR, it is not possible to rank projects according to IRR. In other words, the project with t
comparing two mutually exclusive investments, we may want to know the crossover rate, that is, the interest rate th
have the cash flows for two projects:

t Investment A Investment B
0 $ (100,000) $ (110,000)
1 35,000 38,000
2 29,000 36,000
3 29,000 30,000
4 29,000 29,000
5 20,000 21,000

IRR 14.07% 13.73%

To find the crossover rate, we calculate the incremental cash flows of the larger project, that is, subtract the cash flo
larger project. Notice we used an IF statement to makes sure the cash flows below are always the larger project min
from the larger project are:

Incremental
t cash flows
0 $ (10,000)
1 3,000
2 7,000
3 1,000
4 -
5 1,000

The crossover rate, or incremental IRR, is the IRR of these incremental cash flows, or:

Crossover rate 9.36%

We can create a table to show the NPV of each project at different interest rates and graph the NPV profile of each

R Investment A Investment B
0% $ 42,000.00 $ 44,000.00
5% 24,217.37 25,071.09
10% 9,799.07 9,683.70
15% (2,044.70) (2,988.31)
20% (11,889.15) (13,547.45)

Net Present Value for Mutually Exclusive Investmen

$50,000.00

$40,000.00

$30,000.00
Crossover point
Net present value

$20,000.00
$11,484.54

$10,000.00

$-
0% 5% 10% 15%

$(10,000.00) 9.36%

$(20,000.00)

Interest rate
emble a loan. Consider the following project.

eater than the required return. So, this project looks acceptable for any required return less

NPV > 0

% 20% 25% 30%

 NPV > 0

% 20% 25% 30%

e standard IRR decision rule cannot be used in such cases.

algorithm always starts at the same point, it will always arrive at the same IRR. Generally, this
case, we can use the Guess argument to try to find multiple IRRs. Suppose we have the

ument, we find:
%? It was a guess! But, it also is a long way away from the first IRR that Excel calculated. If

ike this:

PV Profile with Multiple IRRs

$150,000

$100,000

$50,000

$-
0% -10% 0% 10% 20% 30% 40% 50%

$(50,000)

IRR
$(100,000)

$(150,000)

$(200,000)
Interest rate
the MIRR calculation for each method manually first. Suppose we have a project with the

nning of the project. In order to have Excel discount only negative cash flows, we can use an IF
ot a nested IF, but a series of IF statements that calculates the present value of each cash flow
he cash flow. Once we get these modified cash flows, we can calculate the IRR of these cash

ept the cash flow at Time 0 at the end of the project and then calculate the IRR of the two
pproach is:
d cash flows, the intermediate cash flows must be entered as 0, not left blank.

e cash flows at Time 0, the future value of all positive cash flows at the end of the project,
tements to test whether each cash flow is negative or positive. So, the MIRR using the

IRR function, the MIRR is:

xcel was written by computer programmers, so the method that Excel uses is not necessarily
 invest_rate is the reinvestment rate.

RR. In other words, the project with the highest IRR is not necessarily the best project. When
sover rate, that is, the interest rate that makes the NPV of the two projects equal. Below we

r project, that is, subtract the cash flows of the smaller project from the cash flows of the
ow are always the larger project minus the smaller project. So, the incremental cash flows

ws, or:

s and graph the NPV profile of each project. Doing so, we get:
ually Exclusive Investments

rossover point

Investment A
Investment B

% 15% 20%
 Chapter 5 - Section 6
The Profitability Index

The profitability index is the present value of the future cash flows divided by the initial investment. If you remembe
value of future cash flows, so we will use the NPV function divided by the initial investment to calculate the profitab

Suppose we have a project with the following cash flows and required return. What is the profitability index of the p

t Cash flow
0 $ (30,000)
1 8,000
2 10,000
3 11,000
4 17,000
5 12,000

Required return 12%

PI 1.352
Accept or reject? Accept
 e initial investment. If you remember, the NPV function really only calculates the present
investment to calculate the profitability index as follows:

What is the profitability index of the project?

 Chapter 5 - Master It!

As you have already seen, Excel does not have a function to calculate the payback period. We have shown thre
numerous other methods as well. Below, the cash flows for a project are shown. You need to calculate the pay

Calculate the payback period in a table. The first three columns of the table will be the year, the cash flow for t
a. will show the whole year for the payback. In other words, if the payback period is 3 plus years, this column wil
calculate the fractional part of the payback period, or else it will display zero. The last column will add the prev
calculation. You should also have a cell that displays the final payback period by itself, and a cell that returns th
criteria.

Write a nested IF statement that calculates the payback period using only the project cash flow column. The IF
b. no payback period. In contrast to the example we showed previously, the nested IF function should test for the
working towards longer payback periods. Another cell should display the correct accept or reject decision base

t Cash flow
0 $ (250,000)
1 41,000
2 48,000
3 63,000
4 79,000
5 88,000
6 64,000
7 41,000

Required payback 5
ack period. We have shown three ways to calculate the payback period, but there are
n. You need to calculate the payback period using two different methods:

ll be the year, the cash flow for that year, and the cumulative cash flow. The fourth column
d is 3 plus years, this column will have a 3, otherwise it will be a zero. The next column will
The last column will add the previous two columns and display the final payback period
y itself, and a cell that returns the correct accept or reject decision based on the payback

project cash flow column. The IF statement should return a value of "Never" if the project has
ed IF function should test for the payback period starting with shorter payback periods and
ct accept or reject decision based on the payback criteria.
 Master It! Solution

a. Using the table below, calculate the payback period for the project. The cash flows should directly

Cumulative Year of Fractional

t Cash flow cash flow payback year
0
1
2
3
4
5
6
7

Payback period
Accept or reject?

Using only the cash flow column, write a nested IF statement that calculates the payback period. The statemen
b. period.

Payback period
Accept or reject?
ect. The cash flows should directly reference the inputs in the previous worksheet.

Payback
period

the payback period. The statement should show "Never" if the project has no payback