APPENDIX I
FINANCIAL DECISION MAKING WITH EXCEL
In this text book so far, all calculations have been made
manually. However, all the time calculations may not be so
simple. There are numerous decisions situations when the
calculations become tedious and complicated. In such cases,
the spreadsheet of the MICROSOFT OFFICE can be used to
do the calculations that simplify decision making process.
Present Appendix attempts to explain the use of EXCEL sheet
in a variety of situations. Apart from formula building, there
are several built-in functions available that can be used for
specific calculations in the areas of accounting, finance,
statistics, mathematics, etc. Some of these are as follows:
(1) DURATION : Returns the Annual duration of a security
with periodic interest payments.
(2) EFFECT : Returns the annual effective interest rate.
(3) FV : Returns the future value of an investment based on
periodic constant payment and a constant interest rate.
(4) FV SCHEDULE : Returns the future value of an initial
principal after applying a series of compound interest
rate.
(5) INTRATE : Returns the interest rate for a fully invested
security.
(6) IRR : Returns the internal rate of return for a series of
cash flows.
(7) MDURATION : Returns the Macauley modified dura-
tion for a security with an assumed par value of $100.
(8) MIRR : Returns the internal rate of return for a series of
periodic cash flows considering both cost of investment
and interest on reinvestment of cash.
(9) NOMINAL : Returns the annual nominal interest rate.
(10) NPV: Returns the net present value of an investment
based on a discount rate and a series of future payments
(negative values) and incomes (positive values).
(11) PV : Returns the present value of an investment i.e., the
total amount that a series of future payments is worth
now.
(12) XIRR : Returns the internal rate of return for a series of
cash flows.
(13) XNPV: Returns the net present value for a series of cash
flows.
(14) YIELD: Returns the yield on a security that pays periodic
interest.
355
I. APPLICATION IN TIME VALUE OF MONEY
Most of the financial decisions involve the use of concept of
time value of money. Be it capital budgeting, cost of capital,
valuation of assets, etc., cash flows arising at different points
of time are compared before taking the decisions. In order to
compare the cash flows arising at different points of time, the
concepts of present value and future value are applied.
Concepts of Present Value (PV Function) and Future Value
(FV Function) are used in finance for making the cash flows
occurring at different points of time comparable either:
u By discounting the future cash flow to present day, or
u By compounding the present money to a future date.
The techniques of discounting and compounding as a tool to
incorporate TVM in financial decision making through EX-
CEL sheet are explained hereunder.
Present Value can be calculated in two different cases:
(i) PV of a future sum, and
(ii) PV of a future series.
Use of EXCEL spread sheet in such cases can be explained as
follows:
PV of a Future Sum
Example A.1
X sells goods of ` 1,500 on a credit of three years. Opportunity
cost is 10%. Present value of ` 1,500 @10% may be found with
help of Equation 2.2A as follows:
PV = ` 1,500 × PVF(10,3)
= ` 1,500 × .751 = ` 1126.50
EXCEL sheet can be used to present it as follows:
MS OFFICE : EXCEL Application
PV : Returns the Present Value of a single future cash flow
PV (RATE, NPER, PMT, FV, TYPE)
This built-in function can be used to find out the present
value of a future cash flow, accruing after a certain period,
at a given rate of discount. The independent variables used
in PV function are :
Rate = Rate of discount (interest) per period
NPER = No. of periods
FV = Future value
PMT = Used in Annuities and in single future cash flow
TYPE = set to zero.
356 APP. I : FINANCIAL DECISION MAKING WITH EXCEL

PV : Present Value of a Single Future Cash Flow PV of an Annuity Due

A B C D
Example A.3
1. Future Value (`) 1,500
2. Years (NPER) 3 A recurring amount of ` 1,000 is receivable in the beginning
3. Rate (%) 10
of each of 4 years starting from now @ 6%. The PV can be
found with the help of Equation 2.7 as follows:
4. Present Value (PV) 1126.50
PV = ` 1,000 ×PVAF(6%,4)(1+ .06)
5.
6. ➤ = ` 1,000 × 3.465 (1+ .06) = ` 3,673
7. = PV (RATE, NPER, PMT, FV, TYPE) MS OFFICE : EXCEL Application
8. = PV (D3, D2, 0, –D1, 0)
PV : Returns the total present value of an annuity due.
9.
10. The built in function PV can also be used to find out the
11. The result obtained as above is same future value or present value of an annuity due by appro-
12. as given by EXCEL function. priately setting the value of TYPE to 1.
13. PV : Present Value of an Annuity Due
A B C D
PV of a series of Equal Future Cash Flows
1. Present Value (`) —
2. Payment (PMT) 100 1000
Example A.2
3. Rate (%) 6 6
X sells goods for which he offers following option of payment:
4. Years (NPER) 4 4
(i) Pay ` 2,500 now, or (ii) Pay ` 900 each at the end of first year,
second year and third year from now. The customer having 5.
opportunity cost of 10% can choose between these options by 6. Present Value (`) — 3,673
comparing PV of series of ` 900 with ` 2,500 using Equation 7.
2.2B. 8.
PV = ` 900 × PVAF(10,3) 9.

➤
= ` 900 × 2.487 = ` 2,238 10. = PV (RATE, NPER, PMT, TYPE)
EXCEL sheet can be used to present this case as follows: = PV (D3, D4, D1, 1)
11.
MS OFFICE : EXCEL Application 12.
The result obtained as above is same as
13.
PV : Returns the present value of a Future Annuity given by EXCEL function.
14.
PV (RATE, NPER, PMT, FV, TYPE)
PV of a Perpetuity
This built-in function (used in preceding exhibit) can also
be used for finding out the total present value of the series Example A.4
of annuity of a given amount, at a given discount rate. The
independent variables are same as used earlier, but : A bank makes an offer to deposit with it a sum of ` 16,000 and
then receive a return of ` 1,800 p. a. perpetually. Should the
PMT = Future Payment (Annuity Amount)
offer be accepted by an investor whose opportunity rate of
TYPE = 0 for payment at the end of the period return is 12%? Will the decision change if his rate of return is
PV : Present value of a Future Annuity 10%?
A B C D In this case, the PV of the perpetuity can be found as follows:
1. Future Value (`) 0 PV = ` 1,800 ÷ .12 = ` 15,000
2. Years (NPER) 3 EXCEL sheet can be used as follows:
3. Rate (%) 10
A B C D
4. PMT 900
1 ` `
5. Present Value (PV) 2,238
2 Current Deposit 16000
6. ➤
3 Annual Return 1800 PV of Cash flows if =B3/B4
7. = PV (RATE, NPER, PMT, FV, TYPE) (perpetuity) Opportunity Cost is
8. = PV (D3, D2, –D4, 0, 0) 12%
9. 4 Opportunity 0.12 PV of Cash flows if =B3/B5
10. Cost (i) Opportunity Cost is
10%
11. The result obtained as above is same
12. 5 Opportunity 0.10
as given by EXCEL function.
Cost (ii)
13.
14.
 APP. I : FINANCIAL DECISION MAKING WITH EXCEL 357

A B C D FV of a single Present Cash Flow:

6
Example A.6
7
8 PV of Cash flows if Opportunity Cost is 12% 15000 An investor is interested to find out the future value of ` 5,000
PV of Cash flows if Opportunity Cost is 10% 18000
invested today for 10 years @5% rate. As per Equation 2.1A,
9
FV is:
10
FV = ` 5,000 × CVF(5%,10)
11
12 = ` 5,000 ×1.629 = ` 8,145
In EXCEL sheet, the same can be shown as follows:
If the opportunity cost is 10%, PV = ` 1,800/0.10
MS OFFICE : EXCEL Application
= ` 18,000
So, at the opportunity cost of 12%, the bank offer need not be FV : Returns the future value of Single Cash Flow
accepted. However, at 10%, the offer can be accepted. FV(RATE, NPER, PMT, PV, TYPE)
PV of a series of Unequal Future Cash Flows This built-in function can be used to find out the future
The PV function of Excel can be used to find out the present (compounded) value of a single cash flow, occurring today,
value of a stream of cash flows only if the cash flows are equal. at a given rate of interest, after a given period and com-
If the cash flows are unequal the PV can be computed using pounded every desired time interval. The independent
NPV function. NPV function never computes Net Present variables used in FV function are :
Value. It is used to compute the PV of unequal cash flows. Rate = Rate of interest per period
NPER = No. of Periods
Example A.5
PV = Present Value
Continuing with Example A.2, what happens if the future
PMT = Used in Annuities and in single cash flow are
payments are ` 800, ` 900 and ` 1,000.
TYPE = set to zero.
In this case, the PV can be found as follows:
FV : Future Value of a Single Cash Flow
PV = ` 800×PVF(10,1) + ` 900 × PVF(10,2) + ` 1,000 ×
PVF(10,3) A B C D
1. Present Value (PV) 5,000
= ` 2146.50
2. Years (NPER) 10
This can be presented in EXCEL sheet as follows:
3. Rate (%) 5
4. Future Value (FV) 8,145
5.
6. ➤
7. = FV (RATE, NPER, PMT, PV, TYPE)
8. = FV (D3, D2, 0, –D1, 0)
9.
10. The result obtained as above is same
11. as given by EXCEL function.
12.

Before using NPV Function, the cash flows are to be arranged FV of a series of Equal Annual Cash Flows:
in order of their occurrences. Cash outflow is shown as a
negative figure. For example, for first two years there is cash Example A.7
inflow and in the third year there is outflow. Then, the first
two rows of any column will have cash inflows and the third An investor deposits ` 10,000 at the end of each of next 10
row will record the amount of outflow as a negative figure. It years from today. He wants to find out his total accumulation,
is important to note that NPV Function assumes that the first given rate of interest at 10%. This can be presented as:
cash flow occurs at the end of the year. FV = ` 10,000 × CVAF(10%,10)
The Compounding Technique is used to find out the future = ` 10,000 × 15.937 = ` 1,59,370
value of a present money and can be explained as follows:
358 APP. I : FINANCIAL DECISION MAKING WITH EXCEL

Same can be presented in EXCEL Table as follows:
MS OFFICE : EXCEL Application
FV : Returns the future value of an Annuity
FV (RATE, NPER, PMT, PV, TYPE)
receive a specific amount at the end of a particular period.
Investor’s decision in this case will depend on the implicit rate
of return of this deposit.
Example A.9

This built-in function can also be used for finding out the A Deep Discount Bond is issued for ` 5,000 today and will
total compounded value of an annuity of a given amount, mature after 15 years for ` 18,000. Advise an investor whose
at a given rate, after a given period. The independent opportunity rate of return is 11%?
variables are same as used earlier, but Such a problem can be solved with the help of IRR function
of EXCEL.IRR function requires information about seq-
PMT = Payment (Annuity Amount)
uence of cash flows. A cash outflow is shown as a negative
TYPE = D for payment at the end of the period.
cash flow. Since in the above problem, only one cash inflow
FV : Future Value of an Annuity is there, interim cash flows between 1st and 14th year are all
A B C D shown as “0”. Now, the case can be presented as follows:
1. Present Value (PV) 0
2. Payment (PMT) 10,000
3. Rate (%) 10
4. Years (NPER) 10
5. Future Value (FV) 1,59,370
6. ➤
7. = FV (RATE, NPER, PMT, PV, TYPE)
8. = FV (D3, D4, –D2, 0, 0)

FV of an Annuity Due

Example A.8
A recurring deposit of ` 100 is made in the beginning of each 
of next 4 years starting from now @ 6%. What will be total 

deposit at the end of 4 years? This can be found as follows:

FV = ` 100 × CVAF(6%,4) × (1 × .06)
= ` 100 × 4.375 = ` 463.75
This can be presented in EXCEL Sheet as follows: It can be verified that ` 5,000 × (1+8.91%)^15 = ` 18,000.
Accumulating a Target Amount in Equal Annual Instalments
FV : Future Value of an Annuity Due
over a given period
A B C
1. Present Value (`) Example A.10
2. Payment (PMT) 100
How much amount should be invested each of next 5 years
3. Rate (%) 6
@10% to accumulate ` 1,00,000 at the end of that period? With
4. Years (NPER) 4 the help of Equation 2.10, the annual amount can be found as
5. Future Value (`) 463.75 follows :
6. ➤ — Annuity Amount = FV ÷ CVAF(10,5)
7. = FV (RATE, NPER, PMT, PV, TYPE) = ` 1,00,000 ÷ 6.105 = ` 16,380
8. = FV (C3, C4, C1, 0, 1)
The EXCEL sheet can be used as follows:
9.
10. Calculation of CVAF:
The results obtained as above is same as
11.
given by EXCEL function.
12.
13.
14.

Finding out the Implicit Rate of Interest

A finance company may offer a scheme under which an
investor is required to deposit a specific amount now and to