COMPUTING THE PRESENT VALUE

Discount rate 10%

Present
Year Cash flow value
1 100 90.91 <-- =B5/(1+$B$2)^A5
2 100 82.64 <-- =B6/(1+$B$2)^A6
3 100 75.13 <-- =B7/(1+$B$2)^A7
4 100 68.30 <-- =B8/(1+$B$2)^A8
5 100 62.09 <-- =B9/(1+$B$2)^A9

Net present value

Summing cells C5:C9 379.08 <-- =SUM(C5:C9)
Using Excel's NPV function 379.08 <-- =NPV(B2, B5:B9)
Using Excel's PV function 379.08 <-- =PV(B2, 5, -100)
 COMPUTING THE PRESENT VALUE
In this example the cash flows are not equal
Either discount each cash flow separately or use Excel's NPV
function
Excel's PV doesn't work for this case
Discount rate 10%

Present
Year Cash flow value
1 100 90.91 <-- =B5/(1+$B$2)^A5
2 200 165.29 <-- =B6/(1+$B$2)^A6
3 300 225.39 <-- =B7/(1+$B$2)^A7
4 400 273.21 <-- =B8/(1+$B$2)^A8
5 500 310.46 <-- =B9/(1+$B$2)^A9

Net present value

Summing cells C5:C9 1,065.26 <-- =SUM(C5:C9)
Using Excel's NPV function 1,065.26 <-- =NPV(B2, B5:B9)
 COMPUTING THE NET PRESENT VALUE
Discount rate 10%

Present
Year Cash flow value
0 -250 -250.00 <-- =B5/(1+$B$2)^A5
1 100 90.91 <-- =B6/(1+$B$2)^A6
2 200 165.29 <-- =B7/(1+$B$2)^A7
3 300 225.39 <-- =B8/(1+$B$2)^A8
4 400 273.21 <-- =B9/(1+$B$2)^A9
5 500 310.46 <-- =B10/(1+$B$2)^A10

Net present value

Summing cells C5:C9 815.26 <-- =SUM(C5:C10)
Using Excel's NPV function 815.26 <-- =B5+NPV(B2, B6:B10)
 COMPUTING THE VALUE OF A FINITE ANNUITY
Periodic payment, C 1,000
Number of future periods paid, n 5
Discount rate, r 12%
Present value of annuity
Using formula 3,604.78 <-- =B2*(1-1/(1+B4)^B3)/B4
Using Excel's PV function 3,604.78 <-- =PV(B4, B3, -B2)

Annuity
Period payment
1 1,000.00 <-- =B2
2 1,000.00
3 1,000.00
4 1,000.00
5 1,000.00

Present value using Excel's NPV function 3,604.78

 COMPUTING THE VALUE OF AN INFINITE ANNUITY
Periodic payment, C 1,000
Discount rate, r 12%
Present value of annuity 8333.33333 <-- =B2/B3
 COMPUTING THE VALUE OF A FINITE GROWING ANNUITY
Periodic payment, C 1,000.00
Growth rate of payments, g 6%
Number of future periods paid, n 5
Discount rate, r 12%
Present value of annuity
Using formula 4,010.91 <-- =B2*(1-((1+B3)/(1+B5))^B4)/(B5-B3)

Annuity
Period payment
1 1,000.00 <-- =B2
2 1,060.00 <-- =$B$2*(1+$B$3)^(A11-1)
3 1,123.60 <-- =$B$2*(1+$B$3)^(A12-1)
4 1,191.02 <-- =$B$2*(1+$B$3)^(A13-1)
5 1,262.48 <-- =$B$2*(1+$B$3)^(A14-1)

Present value using Excel's NPV function 4,010.91 <-- =NPV(B5, B10:B14)
^B4)/(B5-B3)
COMPUTING THE VALUE OF AN INFITE GROWING ANNUITY
Periodic payment, C 1,000.00 <-- Starting at date 1
Growth rate of payments, g 6%
Discount rate, r 12%
Present value of annuity 16,666.67 <-- =B2/(B4-B3)
 INTERNAL RATE OF RETURN
Cash
Year flow
0 -800
1 200
2 250
3 300
4 350
5 400

Internal rate of return 22.16% <-- =IRR(B3:B8)

 INTERNAL RATE OF RETURN
Discount rate 22.16%

Year Cash flow

0 -800
1 200
2 250
3 300
4 350
5 400

Net present value (NPV) 0.00 <-- =B5+NPV(B2, B6:B10)

 INTERNAL RATE OF RETURN
Year Cash flow
0 -800
1 200
2 250
3 300
4 350
5 400

Interal rate of return 22.16% <-- =IRR(B3:B8)

USING THE IRR IN A LOAN TABLE

Divission of cash flow
between investment
=-B3 income and return of
=$B$10*B15
principal

Investment at
beginning of Cash flow Return of
Year year at the end of year Income principal
1 800.00 200.00 177.28 22.72 <-- =C15-D15
2 777.28 250.00 172.25 77.75
3 699.53 300.00 155.02 144.98
4 554.55 350.00 122.89 227.11
5 327.44 400.00 72.56 327.44
6 0.00
=B15-E15
The remaining investment principal
in the year after the last cash flow is
zero, indicating that all the principal
has been repaid.
- =C15-D15
 USING A LOAN TABLE TO FIND THE IRR
IRR? 24.44%

Divission of cash flow

between investment
income and return of
principal

Principal Cash flow

at beginning of at the end of
Year year year Income Principal
1 1,000.00 300 244.36 55.64 <-- =C6-D6
2 944.36 200 230.76 -30.76
3 975.13 150 238.28 -88.28
4 1,063.41 600 259.86 340.14
5 723.26 900 176.74 723.26
6 0.00
=$B$2*B6
=B6-E6
 Direct calculation of IRR
Year Cash flow
0 -1,000
1 300
2 200
3 150
4 600
5 900

IRR 24.44% <-- =IRR(B3:B8)

 USING EXCEL'S RATE FUNCTION TO
COMPUTE THE IRR
Initial investment 1,000
Periodic cash flows 100
Number of payments 30
IRR 9.307% <-- =RATE(B4, B3, -B2)
 MULTIPLE INTERNAL RATES OF RETURN
Discount rate 6%
NPV -3.99 <-- =NPV(B2, B7:B11)+B6 DATA TABLE
Discount
rate NPV
Year Cash flow -3.99
0 -145 0%
1 100 3%
2 100 6%
3 100 9%
4 100 12%
5 -275 15%
18%
21%
24%
27%
30%
Two IRRs 33%
5.00 36%
4.50
4.00 39%
Net present value

3.50
3.00
2.50
2.00
1.50
1.00 Discount rate
0.50
0.00
0% 10% 20% 30% 40%

Identifying the two IRRs

First IRR 8.78%
Second IRR 26.65%
URN

Table header, <-- =B3

 BOND CASH FLOWS: NPV CROSSES X-ASIS ONLY ONCE, SO THERE IS ONLY
Year Cash flow Data table: Effect of
0 -800 discount rate on NPV
1 100 1,000.00 <-- =NPV(E4, B4:B11)+B3, table header
2 100 0%
3 100 2%
NPV of Bond Cash F
4 100 4%
5 100 6% 1200

6 100 8% 1000
7 100 10% 800
8 1,100 12%
600

NPV
14%
400
IRR 14.36% <-- =IRR(B3:B11) 16%
18% 200

20% 0
0% 5% 10%
Discount rate
, SO THERE IS ONLY ONE IRR

B4:B11)+B3, table header

NPV of Bond Cash Flows

5% 10% 15% 20%

Discount rate
 FLAT PAYMENT SCHEDULES
Loan principal 10000
Interest rate 7%
Loan term 6 <-- Number of years over which loan is repaid
Annual payment 2,097.96 <-- =PMT(B3, B4, -B2)

Split payment into:

Principal
at beginning Payment at Return of
Year of year end of year Interest principal
1 10,000.00 2,097.96 700.00 1,397.96
2 8,602.04 2,097.96 602.14 1,495.82
3 7,106.23 2,097.96 497.44 1,600.52
=C9-F9 4 5,505.70 2,097.96 385.40 1,712.56
5 3,793.15 2,097.96 265.52 1,832.44
6 1,960.71 2,097.96 137.25 1,960.71
7 0.00
=$B$3*C9

=D9-E9
 SIMPLE FUTURE VALUE
Interest 10%

Account Interest Total in

balance, earned account, end
beginning of during year year
Year year
1 1,000.00 100.00 1,100.00 <-- =C5+B5
2 1,100.00 110.00 1,210.00 <-- =C6+B6
3 1,210.00 121.00 1,331.00
4 1,331.00 133.10 1,464.10 =$B$2*B5
5 1,464.10 146.41 1,610.51
6 1,610.51 161.05 1,771.56
7 1,771.56 177.16 1,948.72
8 1,948.72 194.87 2,143.59
9 2,143.59 214.36 2,357.95
10 2,357.95 235.79 2,593.74
11 2,593.74 =D5

A simpler way 2,593.74 <-- =B5*(1+B2)^10

 FUTURE VALUE WITH ANNUAL DEPOSITS
Interest 10%
Annual deposit 1,000 <-- Made today and at beginning of each of next 9 years
Number of deposits 10

Account
Deposit at Interest Total in
balance,
Year beginning of earned during account, end
beginning of
year year year
year
1 0.00 1,000.00 100.00 1,100.00
2 1,100.00 1,000.00 210.00 2,310.00
3 2,310.00 1,000.00 331.00 3,641.00
4 3,641.00 1,000.00 464.10 5,105.10
5 5,105.10 1,000.00 610.51 6,715.61
6 6,715.61 1,000.00 771.56 8,487.17
7 8,487.17 1,000.00 948.72 10,435.89
8 10,435.89 1,000.00 1,143.59 12,579.48
9 12,579.48 1,000.00 1,357.95 14,937.42
10 14,937.42 1,000.00 1,593.74 17,531.17

Future value 17,531.17 <-- =FV(B2, B4, -B3, , 1) =E7

SITS

each of next 9 years

<-- =D7+B7+C7
<-- =D8+B8+C8

=$B$2*(B7+C7)
 A RETIREMENT PROBLEM
Interest 8%
Annual deposit 29,386.55
Annual retirement withdrawal 30,000

Account
Deposit at Interest Total in
balance,
Year beginning of earned during account, end
beginning of
year year year
year
1 0.00 29,386.55 2,350.92 31,737.48
2 31,737.48 29,386.55 4,889.92 66,013.95
3 66,013.95 29,386.55 7,632.04 103,032.54
4 103,032.54 29,386.55 10,593.53 143,012.62
5 143,012.62 29,386.55 13,791.93 186,191.10
6 186,191.10 -30,000.00 12,495.29 168,686.39
7 168,686.39 -30,000.00 11,094.91 149,781.30
8 149,781.30 -30,000.00 9,582.50 129,363.81
9 129,363.81 -30,000.00 7,949.10 107,312.91
10 107,312.91 -30,000.00 6,185.03 83,497.94
11 83,497.94 -30,000.00 4,279.84 57,777.78
12 57,777.78 -30,000.00 2,222.22 30,000.00
13 30,000.00 -30,000.00 0.00 0.00

Note: This problem has 5 deposits and 8 annual withdrawals, all made at the beginning of the year. The
beginning of year 13 is the last year of the retirement plan; if the annual deposit is correctly computed, the
balance at the beginning of year 13 after the withdrawal should be zero.
 <-- =D7+B7+C7

beginning of the year. The

t is correctly computed, the
d be zero.
 A RETIREMENT PROBLEM
Interest 8%
Annual retirement withdrawal 30,000.00
Years of withdrawal 8
Years of deposit 5
Present value of withdrawals 117,331.98 <-- =-PV(B2, B4, B3)/(1+B2)^B5
Annual deposit 29,386.55 <-- =PMT(B2, B5, -B6)
 MULTIPLE COMPOUNDING PERIODS
Initial deposit 1,000
Interest rate 5%
Number of compounding periods per year 2
Interest per compounding period 2.500% <-- =B3/B4
Accretion in one year 1,050.625 <-- =B2*(1+B5)^B4
Continuous compounding with Exp 1,051.271 <-- =B2*EXP(B3)

Effect on Multiple Compounding Periods

1,051.40
1,051.20
1,051.00
End-year accretion

1,050.80
1,050.60
1,050.40
1,050.20
1,050.00
1,049.80 Number of compounding intervals
1 10 100 1000

End-year
Compounding periods per year accretion
1 1,050.000 <-- =$B$2*(1+$B$3/A25)^A25
2 1,050.625 <-- =$B$2*(1+$B$3/A26)^A26
10 1,051.140
20 1,051.206
50 1,051.245
100 1,051.258
150 1,051.262
300 1,051.267
800 1,051.269