Financial Modelling

Financial Modelling
1 Introduction to Financial Modeling and Valuation
1 .1. Introduction to financial modeling
1.2 2. Overview of excel functions for modeling
1.3. Basic Financial Calculations using excel
1.4. Present value and Net Present Value
1.5. The IRR and Loan Tables
1.6. Future values and Applications
1.7. Introduction to valuation and valuation standards
 Introduction
Financial modelling is the process of creating a
summary of a company's expenses and earnings
in the form of a spread sheet that can be used to
calculate the impact of a future event or decision.
 Introduction
• Financial modelling is the construction of spread sheet
models that illustrate a company's likely financial results
in quantitative terms.
• The financial modelling process follows a systematic
approach, start with inputting historical financial data
into an Excel sheet.
• A financial model is a mathematical representation of the
financial operations and financial statements of a
company. It is used to forecast future financial
performance of the company by making relevant
assumptions of how the company would fair in the
coming financial years.
 Overview of excel functions for modelling

• Excel is a spread-sheet program that is used to

record and analyse numerical data. Think of a
spread-sheet as a collection of columns and rows
that form a table.
• Alphabetical letters are usually assigned to columns
and numbers are usually assigned to rows. The
point where a column and a row meet is called a cell.
 1.Basic Financial Calculations using excel

• Almost all financial problems are ran on finding the

value today of a series of cash receipts over time. The
cash receipts (or cash flows, as we will call them) may
be certain or uncertain.
• The present value of a cash flow CF-t predicted to be
received at time-t is

The basic concept in present value calculations is the concept of

opportunity cost.
 Con….

• As an example, suppose we are valuing an

investment which promises $100 per year at the
end of this and the next 4 years.
• There is no doubt that this series of 5 payments
of $100 each will actually be paid. If a bank
pays an annual interest rate of 10% on a 5-year
deposit.
• We can calculate the value of the investment by
discounting its cash flows using this opportunity
cost (PV) as a discount rate
PV= 379.08,
Con…

The present value, 379.08, is the value today of the investment

Con…..

• A few finance basics and their Excel

implementations; Present and Net present
value (NPV); internal rate of return (IRR);
Payment schedules and loan tables; Future
value and Compounded interest
PV & NPV

• Net present value or net present worth is a

core element of financial analysis that
indicates whether a project is going to be
profitable or not. Why is the net present value
so important? Because the basic financial
concept holds that money that can potentially
be received in the future is worth less than the
same amount of money you have right now.
Calculation procedures
1. Determining the discount rate
2. Calculating the NPV:

FV1 FV2 FV3 FVn

NPV = (1+r)1 + + +
(1+r)2 (1+r)3 (1+r)n - I0

where FV = future value of an investment

n = no. of years
r = Rate of return available on an equivalent risk
security in the financial market
11
I 0= initial investment
Con….

Suppose, for example, that the series of 5 cash flows

of $ 100 is sold for $250.

NPV= 379.08-250= 129.08

Con…

NPV= 379.08-250= 129.08

Class work

• Compute the net present value for a project with a net

investment of $100,000 and net cash flows year one is

$55,000; for year two is $80,000 and for year three is $

15,000. Further, the company’s cost of capital is 10%?

• Find Net Present Value .

Internal rate of return (IRR)
• The internal rate of return (IRR) is a
commonly used metric to estimate the
profitability of a potential investment.
• In capital budgeting, IRR is widely used to
evaluate the profitability of a prospective
investment and rank multiple projects. The
general principle is as simple as this: the
higher the internal rate of return, the more
attractive the project is.
IRR- Example:

• You invest $1000 now and get back $500

and $660 in the next 2 years. What discount
rate makes the Net Present Value zero?
• Solution; Try and error to find IRR
 Solution

• As our first guess, let's try 8% rate:

• NPV= 28.8 ; which is not equal to zero

• Second guess; lets try 10% as rate

Con----
• Maybe a better guess, say 10%, can change things?
 Now: PV = -$1,000
 Year 1: PV = $500 / (1+0.1)1 = $454.55
 Year 2: PV = $660 / (1+0.1)2 = $545.45
 NPV: -1000 + $454.55 + $545.45 = $0.00
• That's it! At 10% discount rate, the NPV is exactly 0. So, the
IRR for this investment is 10%:
 Class work

• You invest $10,000 now and get back $1000;

$2000 and $3000 in the next 3years. What
discount rate makes the Net Present Value
zero?
• Solution; Try and error to find IRR
Data valuation and valuation standards

• The subtopic explains how to do Data

Validation in Excel: create a validation rule
for numbers, dates or text values, make data
validation lists, copy data validation to other
cells, find invalid entries, fix and remove data
validation.
 Con…
• Excel Data Validation is a feature that restricts (validates) user
input to a worksheet. Technically, you create a validation rule that
controls what kind of data can be entered into a certain cell.
• Here are just a few examples of what Excel's data validation can
do:
 Allow only numeric or text values in a cell.

 Allow only numbers within a specified range.

 Allow data entries of a specific length.

 Restrict dates and times outside a given range.

Con…

• For instance, you can set up a rule that limits

data entry to 4-digit numbers between 1000
and 9999. If the user types something
different, Excel will show an error alert
explaining what they have done wrong: