Time Value of Money

Time affects the value of money. If you have to choose between $100 today and the same amount five
years from now, the obvious choice is to take the money now because you can always put the money
in a bank and collect it back with interest in five years time. However, it would be less obvious if the
choice is between $100 now and $125 in five years. This would depend on what return rate you expect
for your money. Another question you can ask is what $100 in five years' time is worth today. There are
more situations and factors to consider. What are they?

Excel provides financial functions to help make work easier. The functions explored here can be divided
into two groups: (1) PMT, PV, FV, RATE, and NPER; and (2) NPV and IRR. In the first group, any one
of the five key variables can be computed, given the values of the other four. Each function, appropriately
named, computes that value using the other values as inputs.

For the second group, given the discount rate, any series of in or out monetary movements for each
time period over a time horizon can be converted to the equivalent of a single value today using the NPV
function. Alternatively, we can seek the discount rate that will give a zero net present value (NPV). This
rate, called the internal rate of return (IRR), can be computed using the IRR function.

What is the difference between this rate and the discount rate? Do we need to compare the two? Other
similar functions include IPMT, PPMT, and XNPV. How are they different from the earlier ones?

This exercise was written as a basis for class discussion. It illustrates neither the effective nor ineffective
management of the given situation. Data provided may be entirely hypothetical.

LeongTY 753780827.xlsx/Home
 Payment made at the END of period TYPE: end or beginning of a period Inflow: positive amount (e.g. loan, interest, sa
TYPE 0 PV: present value Outflow: negative
PV 50,000.00 FV: future value
FV 1,000.00 PMT: payment amount
??? PMT -$5,191.08 =PMT(C8,C9,C5,C6,C4) RATE: interest/discount rate Applicable to:
RATE 2% NPER: number of periods - Loan account
NPER 11 - Saving account

Model Example Loan account

Period Beginning End Period Beginning End
1 PV X1 = PV * (1+rate) + PMT 1 50,000.00 45,808.92
2 X1 X2 = X1 * (1+rate) + PMT 2 45,808.92 41,534.03
3 X2 X3 = X2 * (1+rate) + PMT 3 41,534.03 37,173.63
4 X3 X4 = X3 * (1+rate) + PMT 4 37,173.63 32,726.03
5 X4 X5 = X4 * (1+rate) + PMT 5 32,726.03 28,189.48
6 X5 X6 = X5 * (1+rate) + PMT 6 28,189.48 23,562.19
7 X6 X7 = X6 * (1+rate) + PMT 7 23,562.19 18,842.36
8 X7 X8 = X7 * (1+rate) + PMT 8 18,842.36 14,028.13
9 X8 X9 = X8 * (1+rate) + PMT 9 14,028.13 9,117.62
10 X9 X10 = X9 * (1+rate) + PMT 10 9,117.62 4,108.90
11 = NPER X10 X11 = X10 * (1+rate) + PMT = - FV 11 4,108.90 -1,000.00

Payment made at the BEGINNING of period

TYPE 1
PV 50,000.00
FV 1,000.00
??? PMT -$5,089.29 =PMT(C31,C32,C28,C29,C27)
RATE 2%
NPER 11 44910.71

Model Example
Period Beginning End Period Beginning End
1 PV + PMT Y1 = (PV + PMT) * (1+rate) 1 44,910.71 45,808.92
2 Y1 + PMT Y2 = (Y1+PMT) * (1+rate) 2 40,719.64 41,534.03
3 Y2 + PMT Y3 = (Y2+PMT) * (1+rate) 3 36,444.74 37,173.63
4 Y3 + PMT Y4 = (Y3+PMT) * (1+rate) 4 32,084.34 32,726.03
5 Y4 + PMT Y5 = (Y4+PMT) * (1+rate) 5 27,636.74 28,189.48
6 Y5 + PMT Y6 = (Y5+PMT) * (1+rate) 6 23,100.19 23,562.19
7 Y6 + PMT Y7 = (Y6+PMT) * (1+rate) 7 18,472.90 18,842.36
8 Y7 + PMT Y8 = (Y7+PMT) * (1+rate) 8 13,753.07 14,028.13
9 Y8 + PMT Y9 = (Y8+PMT) * (1+rate) 9 8,938.84 9,117.62
10 Y9 + PMT Y10 = (Y9+PMT) * (1+rate) 10 4,028.33 4,108.90
11 = NPER Y10 + PMT Y11 = (Y10+PMT) * (1+rate) = - FV 11 -980.39 -1,000.00
w: positive amount (e.g. loan, interest, saving)
low: negative amount (e.g. payment)

=50000*(1+2%) - 5191.08
=45808.92*(1+2%) - 5191.08
….

=(50000-5089.29)*(1+2%)
=(45808.92-5089.29)*(1+2%)
….
 Goal Seek Copyright © Leong Thin Yin, 2008. All Rights Reserved.

The typical use of a model is to compute its output for any given set of input values. Goal Seek is a tool
that allows you to work backwards to find the input value of a variable that will give the desired value for
an output variable. This inverse function operation is done in the background using iterative calculation,
much like what you would do by trial-and-error but smarter. Goal Seek is particularly useful in cases
where the formulas to determine the solution cannot be so easily and directly manipulated to obtain their
inverse. It is also simpler for maintenance not to have to keep a second set of formulas that compute in
a reverse direction.

After you have completed your model, you are ready to use Goal Seek. To apply it, select Data/What-
If Analysis/Goal Seek. Enter the target output as the set cell, the desired output value as the target
value, and the input cell as the cell to change. Click OK and the answer will be computed usually within
a short time. The underlying Goal Seek algorithm may not converge in its search and there may also be
more than one solution. To ensure faster convergence and to get the appropriate solution, the initial
input variable value needs to be close to the desired solution.

To set limits on the search in case it does not converge fast enough, select from the Office Button,
Excel Options/Formulas. Under Calculation options, set the maximum iterations and maximum
change. If the number of iterations taken by Goal Seek exceeds the specified maximum iteration, the
search ends without a solution. The algorithm terminates successfully when the difference between the
results of two consecutive iterations is less than the specified maximum difference. The algorithm will as
such converge faster when a larger maximum change value is used, at the expense of lower precision
in the solution value. You do not normally need to change the given default settings. These settings are
also used for iterative calculations, which is a topic explored in the Charity Donation exercise.

LeongTY 753780827.xlsx/Learn
 Notations Copyright © Leong Thin Yin, 2007. All Rights Reserved.

Period pv, fv pmt

0 17,000 20,000 pv
18,000
1 (3,000) 16,000
2 (3,000) 14,000
12,000
3 (3,000) 10,000 fv f
4 (3,000) 8,000 v
5 (3,000) 6,000
4,000
6 (3,000) 2,000
7 (3,000) 0
(2,000)
8 (3,000) 0 1 2 3 4 5 6 7 8 9 10
: : : : r
(4,000) pe
9 (3,000) (6,000) N
10 (3,000) (8,000) pmt
(10,000)
: (3,000) (12,000)
: (3,000) (14,000)
: (3,000) (16,000)
(18,000)
: (3,000) (20,000)
Nper 8,000 (3,000)

Notes
pv Present value (or first amount) Nper Number of periods
pmt Periodic (equal) amounts Rate Rate of return
fv Future value (or last amount)

Traditionally, a diagram like this is used to represent payments and receipts over time. The usual
convention, also used by Excel, is that received amounts are positive and paid out amounts are
negative. Of course, it must be clear who or what entity is receiving and paying out. For example, it
may be my pocket or my bank account. What story can you tell with this diagram?

It is better to simplify the model rather than be too precise in representation.

For example, it will be overly complex to deal with money moving continuously during a period.
Try to use fewer periods by merging days into weeks, weeks into months, months into years, etc.
The simplification should err on the side of being conservative to your client.

LeongTY 753780827.xlsx/Explain
 Extra care
Nper refers to the number of time periods.
Rate is also given for each period, the duration of which do not have to be declared.
Just be consistent on what a period is.

Choose a frame of reference that will be used for determining whether +ve or -ve should
be applied to the amount moved.

Money can move at the beginning, the end, or during a period.

This should be carefully specified in the formulas.
Remember that returns cannot be earned if the money is added at the end of the period.

It is better to simplify the model rather than be too precise in representation.

For example, it will be overly complex to deal with money moving continuously during a period.
Try to use fewer periods by merging days into weeks, weeks into months, months into years, etc.
The simplification should err on the side of being conservative to your client.

LeongTY 753780827.xlsx/Explain
Questions
?What is $100 today worth in five years' time

?What is the amount needed now to get $100 in five years' time
 Time Value of Money Copyright © Leong Thin Yin, 2008. All Rights Reserved.

Example
Initial Rate Years Final
$100.00 3% 4 $ 112.55

Years
Rate 5% 6% 7% 8% 9% 10% 11% 12%
1 105.00 106.00 107.00 108.00 109.00 110.00 111.00 112.00
2 110.25 112.36 114.49 116.64 118.81 121.00 123.21 125.44
3 115.76 119.10 122.50 125.97 129.50 133.10 136.76 140.49
4 121.55 126.25 131.08 136.05 141.16 146.41 151.81 157.35
5 127.63 133.82 140.26 146.93 153.86 161.05 168.51 176.23
6 134.01 141.85 150.07 158.69 167.71 177.16 187.04 197.38
7 140.71 150.36 160.58 171.38 182.80 194.87 207.62 221.07
8 147.75 159.38 171.82 185.09 199.26 214.36 230.45 247.60
9 155.13 168.95 183.85 199.90 217.19 235.79 255.80 277.31
10 162.89 179.08 196.72 215.89 236.74 259.37 283.94 310.58
11 171.03 189.83 210.49 233.16 258.04 285.31 315.18 347.85
12 179.59 201.22 225.22 251.82 281.27 313.84 349.85 389.60
13 188.56 213.29 240.98 271.96 306.58 345.23 388.33 436.35
14 197.99 226.09 257.85 293.72 334.17 379.75 431.04 488.71
15 207.89 239.66 275.90 317.22 364.25 417.72 478.46 547.36
16 218.29 254.04 295.22 342.59 397.03 459.50 531.09 613.04
17 229.20 269.28 315.88 370.00 432.76 505.45 589.51 686.60
18 240.66 285.43 337.99 399.60 471.71 555.99 654.36 769.00
19 252.70 302.56 361.65 431.57 514.17 611.59 726.33 861.28
20 265.33 320.71 386.97 466.10 560.44 672.75 806.23 964.63

LeongTY 753780827.xlsx/Model
 Exercise
Initial Rate /yr Years Final LBx Ubx
$100.00 3% 4 Threshold 1.3 2.5

Years
Rate 5% 6% 7% 8% 9% 10% 11% 12%
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20

LeongTY 753780827.xlsx/Model
 Financial Functions Copyright © Leong Thin Yin, 2007. All Rights Reserved.

Model
Rate Nper pv fv pmt
4.00% 24.0 $80,000 -$10,000 -$4,991

Example
Nper Period Payments
Rate $4,991 3.00% 3.25% 3.50% 3.75% 4.00% 4.25% 4.50% 4.75%
1
2
3
4
5
6
7
8
9
10

Exercise 1
Nper Period Payments
Rate

LeongTY 753780827.xlsx/Model(2)
 Notes
What would the monthly payments be for other loan amounts (pv)?
1. Use the exercise space provided to do the example using only relative and absolute referencing.
2. Check for formats, look and feel, etc. Are your results the same as the example's.
3. Redo using the DataTable method and see how it simplifies computations.

Practice on other financial functions, e.g. by keeping the monthly payment constant and
to determine the fv ("ballon") payment.

Documentation
pmt C9 =-H5
pmt D10:K19 {=TABLE(D5,E5)}

{ } is usually obtained by Shift + Ctrl + Enter

LeongTY 753780827.xlsx/Model(2)
 Financial Functions Copyright © Leong Thin Yin, 2004. All Rights Reserved.

Very Interactive Model

Rate Nper pv fv pmt
4.00% 24.0 $80,000 -$10,000 -$4,991

Notes
You can change the data in the cells of any four of the five variables. The value of the fifth variable is
recalculated as soon as the fifth cell is cleared.

This unusual model uses the advance "Event-triggering" feature of Excel macro.

We will learn more about macros in later classes. Can you figure out the broad idea of how this is done?

LeongTY 753780827.xlsx/Model(3)
 Equal Periodic Payments Copyright © Leong Thin Yin, 2007. All Rights Reserved.

Situation
I want to borrow $140,000 to buy a car. The bank is willing to lend me the money for a period of
five years at 5% per annum (monthly rest). The payment schedule is a fixed amount every month
for 60 months and a "ballon" payment of $10,000 with the last payment. How much do I have to
pay the bank each month?

Using Excel financial function

Rate Nper pv fv pmt
5.0% 60 $140,000 -$10,000 -$2,495
per yr mth .Remove this to see the solution
=PMT(B12/12,C12,D12,E12)

Practice
Rate Nper pv fv pmt

per yr mth

LeongTY 753780827.xlsx/PMT
 Questions
Compare the answers of the two methods. They should be the same.
Explain why you would prefer one method over the other.
What if the payments are not done at the end of the month?

Without Excel financial function By trial and error, or use Goal Seek.
Interest Target Last Last Residue
5.0% $10,000 $10,000 =N74
per yr

Month Payment Residue Loan

0 $140,000
1 $2,495 $138,088 =N14*(1+L$10/12)-M15
2 $2,495 $136,169
3 $2,495 $134,241
4 $2,495 $132,306
5 $2,495 $130,362
6 $2,495 $128,410
7 $2,495 $126,450
8 $2,495 $124,482
9 $2,495 $122,506
10 $2,495 $120,522
11 $2,495 $118,529
12 $2,495 $116,528
13 $2,495 $114,518
14 $2,495 $112,501
15 $2,495 $110,474
16 $2,495 $108,440
17 $2,495 $106,397
18 $2,495 $104,345
19 $2,495 $102,285
20 $2,495 $100,216
21 $2,495 $98,139
22 $2,495 $96,053
23 $2,495 $93,958
24 $2,495 $91,855
25 $2,495 $89,743
26 $2,495 $87,622
27 $2,495 $85,492
28 $2,495 $83,353
29 $2,495 $81,205
30 $2,495 $79,049
31 $2,495 $76,883
32 $2,495 $74,709
33 $2,495 $72,525
34 $2,495 $70,332
35 $2,495 $68,130
36 $2,495 $65,919
37 $2,495 $63,699
38 $2,495 $61,470
39 $2,495 $59,231
40 $2,495 $56,983
41 $2,495 $54,725
42 $2,495 $52,458
43 $2,495 $50,182

LeongTY 753780827.xlsx/PMT
 Situation
I want to borrow $140,000 to buy a car. The bank is willing to lend me the money for a period of
five years at 5% per annum (monthly rest). The payment schedule is a fixed amount every month
for 60 months and a "ballon" payment of $10,000 with the last payment. How much do I have to
pay the bank each month?

Loan account
Practice
Interest Target Last Last Residue
5.0% $10,000 $10,000 =Y74 TYPE 0.00 Assumption: payments at
per yr PV 140000.00 =Y14
FV -10000.00 =-X10
Month Payment Residue Loan ??? PMT -2494.93 =PMT(AC14,AC15,AC11,A
0 $140,000 RATE 0.417% =W10/12
1 -$2,494.93 $138,088 =Y14*(1+$W$10/12)+X15 NPER 60.00
2 -$2,495 $136,169
3 -$2,495 $134,241
4 -$2,495 $132,306
5 -$2,495 $130,362
6 -$2,495 $128,410
7 -$2,495 $126,450
8 -$2,495 $124,482
9 -$2,495 $122,506
10 -$2,495 $120,522
11 -$2,495 $118,529
12 -$2,495 $116,528
13 -$2,495 $114,518
14 -$2,495 $112,501
15 -$2,495 $110,474
16 -$2,495 $108,440
17 -$2,495 $106,397
18 -$2,495 $104,345
19 -$2,495 $102,285
20 -$2,495 $100,216
21 -$2,495 $98,139
22 -$2,495 $96,053
23 -$2,495 $93,958
24 -$2,495 $91,855
25 -$2,495 $89,743
26 -$2,495 $87,622
27 -$2,495 $85,492
28 -$2,495 $83,353
29 -$2,495 $81,205
30 -$2,495 $79,049
31 -$2,495 $76,883
32 -$2,495 $74,709
33 -$2,495 $72,525
34 -$2,495 $70,332
35 -$2,495 $68,130
36 -$2,495 $65,919
37 -$2,495 $63,699
38 -$2,495 $61,470
39 -$2,495 $59,231
40 -$2,495 $56,983
41 -$2,495 $54,725
42 -$2,495 $52,458
43 -$2,495 $50,182

LeongTY 753780827.xlsx/PMT
Assumption: payments at the end of a period

Ending balance of loan account at 60th month: $10,000

=PMT(AC14,AC15,AC11,AC12,AC10)

LeongTY 753780827.xlsx/PMT
n: payments at the end of a period

Ending balance of loan account at 60th month: $10,000

4,AC15,AC11,AC12,AC10)

LeongTY 753780827.xlsx/PMT
 44 $2,495 $47,896
45 $2,495 $45,601
46 $2,495 $43,296
47 $2,495 $40,981
48 $2,495 $38,657
49 $2,495 $36,323
50 $2,495 $33,980
51 $2,495 $31,626
52 $2,495 $29,263
53 $2,495 $26,890
54 $2,495 $24,507
55 $2,495 $22,114
56 $2,495 $19,712
57 $2,495 $17,299
58 $2,495 $14,876
59 $2,495 $12,443
60 $2,495 $10,000

LeongTY 753780827.xlsx/PMT
 44 -$2,495 $47,896
45 -$2,495 $45,601
46 -$2,495 $43,296
47 -$2,495 $40,981
48 -$2,495 $38,657
49 -$2,495 $36,323
50 -$2,495 $33,980
51 -$2,495 $31,626
52 -$2,495 $29,263
53 -$2,495 $26,890
54 -$2,495 $24,507
55 -$2,495 $22,114
56 -$2,495 $19,712
57 -$2,495 $17,299
58 -$2,495 $14,876
59 -$2,495 $12,443
60 -$2,495 $10,000

LeongTY 753780827.xlsx/PMT
 Present Value Copyright © Leong Thin Yin, 2007. All Rights Reserved.

Situation
I want to spend nine months away on an overseas exchange program or work assignment. I would
need $3,500 each month for expenses and in the last month, an additional $600 for buying gifts.
At 3% per year interest, how much money (after paying for airfare, etc.) should I have initially in my
bank account to cover the cost of this adventure?

Using Excel financial function

Rate Nper pv fv pmt
3.0% 9 $31,774 -$600 -$3,500
per yr mth .Remove this to see the solution
=PV(B12/12,C12,F12,E12,1)

Practice
Rate Nper pv fv pmt

per yr mth

LeongTY 753780827.xlsx/PV
 Questions
Compare the answers of the two methods. They should be the same.
Explain why you would prefer one method over the other.
What if the withdrawals are not done at the beginning of the month?

Without Excel financial function By trial and error, or use Goal Seek.
Interest Target Last Last Balance
3.0% $600 $600 =N23
per yr

Month Withdraw Balance

0 $31,774
1 $3,500 $28,345 =(N14-M15)*(1+L$10/12)
2 $3,500 $24,907
3 $3,500 $21,461
4 $3,500 $18,005
5 $3,500 $14,542
6 $3,500 $11,069
7 $3,500 $7,588
8 $3,500 $4,099
9 $3,500 $600

LeongTY 753780827.xlsx/PV
 Situation
I want to spend nine months away on an overseas exchange program or work assignment. I would
need $3,500 each month for expenses and in the last month, an additional $600 for buying gifts.
At 3% per year interest, how much money (after paying for airfare, etc.) should I have initially in my
bank account to cover the cost of this adventure?

Saving account
Practice
Interest Target Last Last Balance
3.0% $600 TYPE 1.00 Withdraw cash from the begin
per yr ??? PV 31774.27 =PV(AC14,AC15,AC13,AC12,
FV -600.00 =-X10
Month Withdraw Balance PMT -3500.00 =-X15
0 $31,774 =AC11 RATE 0.25% =W10/12
1 $3,500 $28,345 =(Y14-X15)*(1+$W$10/12) NPER 9.00
2 $3,500 $24,907
3 $3,500 $21,461
4 $3,500 $18,005
5 $3,500 $14,542
6 $3,500 $11,069
7 $3,500 $7,588
8 $3,500 $4,099
9 $3,500 $600

LeongTY 753780827.xlsx/PV
Withdraw cash from the beginning
=PV(AC14,AC15,AC13,AC12,AC10)
Ending balance of this account at the end of the last period: $600

LeongTY 753780827.xlsx/PV
 Future Value Copyright © Leong Thin Yin, 2007. All Rights Reserved.

Situation
I am investing $50,000 right now and will add $8,000 each year for the next 10 years. The expected
return of this investment is 6.5% per year. At the end of 10 years, how much money would I be
expected to have?

Using Excel financial function

Rate Nper pv fv pmt
6.5% 10 -$50,000 $201,812 -$8,000
per yr yr .Remove this to see the solution
=FV(B12,C12,F12,D12)

Practice
Rate Nper pv fv pmt

per yr yr

LeongTY 753780827.xlsx/FV
 Questions
Compare the answers of the two methods. They should be the same.
Explain why you would prefer one method over the other.
What if the investment injections are not done at the end of the year?

Without Excel financial function

Interest End Value
6.5% $201,812 =N24
per yr

Year Injection Investment

0 $50,000
1 $8,000 $61,250 =N14*(1+L$10)+ M15
2 $8,000 $73,231
3 $8,000 $85,991
4 $8,000 $99,581
5 $8,000 $114,053
6 $8,000 $129,467
7 $8,000 $145,882
8 $8,000 $163,365
9 $8,000 $181,983
10 $8,000 $201,812

LeongTY 753780827.xlsx/FV
 Situation
I am investing $50,000 right now and will add $8,000 each year for the next 10 years. The expected
return of this investment is 6.5% per year. At the end of 10 years, how much money would I be
expected to have?

Saving account
Practice
Interest End Value
6.5% TYPE 0 Assumption
per yr PV $50,000 =Y14
??? FV -$201,812.25 =FV(AC14,AC15,AC13,AC1
Year Injection Investment PMT $8,000.00 =X15
0 $50,000 RATE 6.5% =W10
1 $8,000 $61,250 =Y14*(1+$W$10)+X15 NPER 10
2 $8,000 $73,231
3 $8,000 $85,991
4 $8,000 $99,581
5 $8,000 $114,053
6 $8,000 $129,467
7 $8,000 $145,882
8 $8,000 $163,365
9 $8,000 $181,983
10 $8,000 $201,812

LeongTY 753780827.xlsx/FV
=FV(AC14,AC15,AC13,AC11,AC10)

LeongTY 753780827.xlsx/FV
 Rate of Return Copyright © Leong Thin Yin, 2007. All Rights Reserved.

Situation
I am investing $50,000 right now and will add $8,000 each year for the next 10 years. If I want the
money to grow to $250,000, what kind of expected return rate must I get for my money?

Using Excel financial function

Rate Nper pv fv pmt
9.6% 10 -$50,000 $250,000 -$8,000
per yr yr
=RATE(C12,F12,D12,E12) .Remove this to see the solution

Practice
Rate Nper pv fv pmt

per yr yr

LeongTY 753780827.xlsx/RATE
 Questions
Compare the answers of the two methods. They should be the same.
Explain why you would prefer one method over the other.
What if the investment injections are not done at the end of the year?

Without Excel financial function By trial and error, or use Goal Seek.
Return Rate Tgt End End Value
9.6% $250,000 $250,000 =N24
per yr

Year Injection Investment

0 $50,000
1 $8,000 $62,796 =N14*(1+L$10)+ M15
2 $8,000 $76,820
3 $8,000 $92,189
4 $8,000 $109,033
5 $8,000 $127,492
6 $8,000 $147,722
7 $8,000 $169,892
8 $8,000 $194,190
9 $8,000 $220,818
10 $8,000 $250,000

LeongTY 753780827.xlsx/RATE
 Situation
I am investing $50,000 right now and will add $8,000 each year for the next 10 years. If I want the
money to grow to $250,000, what kind of expected return rate must I get for my money?

Saving account

Practice
Return Rate Tgt End End Value
9.593% $250,000 TYPE 0 Assumption
per yr PV $50,000 =Y14
FV -$250,000 =-X10
Year Injection Investment PMT $8,000.00 =X15
0 $50,000 ??? RATE 9.593% =RATE(AC15,AC13,AC11
1 $8,000 $62,796 =Y14*(1+$W$10)+X15 NPER 10
2 $8,000 $76,820
3 $8,000 $92,189
4 $8,000 $109,033
5 $8,000 $127,492
6 $8,000 $147,722
7 $8,000 $169,892
8 $8,000 $194,190
9 $8,000 $220,818
10 $8,000 $250,000

LeongTY 753780827.xlsx/RATE
Assumption

=RATE(AC15,AC13,AC11,AC12,AC10)

LeongTY 753780827.xlsx/RATE
 Number of Periods Copyright © Leong Thin Yin, 2007. All Rights Reserved.

Situation
I am investing $50,000 right now and will add $8,000 each year. If the return rate is 8% per year,
how many years must I invest before the investment grows to $250,000?

Using Excel financial function

Rate Nper pv fv pmt
8.0% 11 -$50,000 $250,000 -$8,000
per yr yr
.Remove this to see the solution
=NPER(B12,F12,D12,E12)

Practice
Rate Nper pv fv pmt

per yr yr

LeongTY 753780827.xlsx/NPER
 Questions
Compare the answers of the two methods. They should be the same.
Explain why you would prefer one method over the other.
What if the investment injections are not done at the end of the year?

Without Excel financial function

Return Rate Target End Invest Duration
8.0% $250,000 12 =MATCH(M10,N14:N34,1)
per yr yr

Year Injection Investment

0 $50,000
1 $8,000 $62,000 =N14*(1+L$10)+M15
2 $8,000 $74,960
3 $8,000 $88,957
4 $8,000 $104,073
5 $8,000 $120,399
6 $8,000 $138,031
7 $8,000 $157,074
8 $8,000 $177,640
9 $8,000 $199,851
10 $8,000 $223,839
11 $8,000 $249,746
12 $8,000 $277,726
13 $8,000 $307,944
14 $8,000 $340,579
15 $8,000 $375,825
16 $8,000 $413,891
17 $8,000 $455,003
18 $8,000 $499,403
19 $8,000 $547,355
20 $8,000 $599,144

LeongTY 753780827.xlsx/NPER
 Situation
I am investing $50,000 right now and will add $8,000 each year. If the return rate is 8% per year,
how many years must I invest before the investment grows to $250,000?

Practice
Return Rate Target End Invest Duration
8.0% $250,000 TYPE 0 Assumption
per yr yr PV $50,000 =Y14
FV -$250,000 =-X10
Year Injection Investment PMT $8,000.00 =X15
0 $50,000 RATE 8% =W10
1 $8,000 $62,000 =Y14*(1+$W$10)+X15 ??? NPER 11.009439 =NPER(AC14,AC13,AC1
2 $8,000 $74,960
3 $8,000 $88,957
4 $8,000 $104,073
5 $8,000 $120,399
6 $8,000 $138,031
7 $8,000 $157,074
8 $8,000 $177,640
9 $8,000 $199,851
10 $8,000 $223,839
11 $8,000 $249,746
12 $8,000 $277,726
13 $8,000 $307,944
14 $8,000 $340,579
15 $8,000 $375,825
16 $8,000 $413,891
17 $8,000 $455,003
18 $8,000 $499,403
19 $8,000 $547,355
20 $8,000 $599,144

LeongTY 753780827.xlsx/NPER
Assumption

=NPER(AC14,AC13,AC11,AC12,AC10)

LeongTY 753780827.xlsx/NPER
 Net Present Value Copyright © Leong Thin Yin, 2007. All Rights Reserved.

Situation
I am investing in a project with an initial $200,000 and a sequence of cash flows thus generated as
shown below. If the return rate is 8% per year, what is the project worth at today's value?

Using Excel financial function

Return Rate NPV Return Rate NPV
8.0% $157,453
per yr per yr
.Remove this to see the solution Practice
Year CashFlow Year CashFlow
0 -$200,000 0 -$200,000
1 $56,990 1 $56,990
2 $54,637 2 $54,637
3 $56,529 3 $56,529
4 $58,957 4 $58,957
5 $48,988 5 $48,988
6 $58,416 6 $58,416
7 $40,820 7 $40,820
8 $56,935 8 $56,935
9 $48,186 9 $48,186
10 $44,898 10 $44,898

LeongTY 753780827.xlsx/NPV
 Questions
Compare the answers of the two methods. They should be the same.
Explain why you would prefer one method over the other.
What if the cash flow amounts are not done at the end of the year?

Without Excel financial function

Return Rate NPV
8.0% 157,453 =SUM(N14:N24)
per yr

Year CashFlow PresentValue

0 -$200,000 -$200,000 =M14/(1+L$10)^L14
1 $56,990 $52,769
2 $54,637 $46,842
3 $56,529 $44,875
4 $58,957 $43,335
5 $48,988 $33,340
6 $58,416 $36,812
7 $40,820 $23,818
8 $56,935 $30,760
9 $48,186 $24,105
10 $44,898 $20,796

LeongTY 753780827.xlsx/NPV
 Situation
I am investing in a project with an initial $200,000 and a sequence of cash flows thus generated as
shown below. If the return rate is 8% per year, what is the project worth at today's value?
risk free interest rate

$ 100.00 $ 108.00
Practice
Return Rate NPV Project 1 $ 108.00
8.0% 157,453 $100
per yr =SUM(Y14:Y24)
risk free interest rate $157,452.78 =NPV(W10,X15:X24)+X14
Year CashFlow PresentValue
0 -$200,000 -$200,000
1 $56,990 $52,769 =X15/(1+$W$10)^W15 Present value of the future cash flows:
2 $54,637 $46,842 $357,453
3 $56,529 $44,875
4 $58,957 $43,335
5 $48,988 $33,340
6 $58,416 $36,812
7 $40,820 $23,818
8 $56,935 $30,760
9 $48,186 $24,105
10 $44,898 $20,796

LeongTY 753780827.xlsx/NPV
uture cash flows:

LeongTY 753780827.xlsx/NPV
 Internal Rate of Return Copyright © Leong Thin Yin, 2007. All Rights Reserved.

Situation
I am investing in a project with an initial $200,000 and a sequence of cash flows thus generated as
shown below. What would the return rate need to be for the sum of the return cashflows to be
equivalent to the initial investment?

Using Excel financial function

IRR IRR
24.0%
per yr per yr
.Remove this to see the solution Practice
Year CashFlow Year CashFlow
0 -$200,000 0 -$200,000
1 $56,990 1 $56,990
2 $54,637 2 $54,637
3 $56,529 3 $56,529
4 $58,957 4 $58,957
5 $48,988 5 $48,988
6 $58,416 6 $58,416
7 $40,820 7 $40,820
8 $56,935 8 $56,935
9 $48,186 9 $48,186
10 $44,898 10 $44,898

LeongTY 753780827.xlsx/IRR
 Questions
Compare the answers of the two methods. They should be the same.
Explain why you would prefer one method over the other.
What if the cash flow amounts are not done at the end of the year?

Without Excel financial function By trial and error, or use Goal Seek.
Return Rate NPV
24.0% 0 =SUM(N14:N24)
per yr

Year CashFlow PresentValue

0 -$200,000 -$200,000 =M14/(1+L$10)^L14
1 $56,990 $45,943
2 $54,637 $35,507
3 $56,529 $29,616
4 $58,957 $24,900
5 $48,988 $16,679
6 $58,416 $16,034
7 $40,820 $9,032
8 $56,935 $10,156
9 $48,186 $6,929
10 $44,898 $5,205

LeongTY 753780827.xlsx/IRR
 Situation
I am investing in a project with an initial $200,000 and a sequence of cash flows thus generated as
shown below. What would the return rate need to be for the sum of the return cashflows to be
equivalent to the initial investment?

Practice
Return Rate NPV
24.0% 0
per yr

Year CashFlow PresentValue

0 -$200,000 -$200,000 =X14/(1+$W$10)^W14
1 $56,990 $45,943
2 $54,637 $35,507 24%
3 $56,529 $29,616 =IRR(X14:X24)
4 $58,957 $24,900
5 $48,988 $16,679
6 $58,416 $16,034
7 $40,820 $9,032
8 $56,935 $10,156
9 $48,186 $6,929
10 $44,898 $5,205

LeongTY 753780827.xlsx/IRR