1.

Net Present Value (NPV)

Objective: Learn to calculate and interpret Net Present Value.

1.1. Understanding NPV

 Definition: Net Present Value (NPV) is the sum of the present values of incoming and
outgoing cash flows over a period of time.
 Importance: Used in capital budgeting to assess the profitability of an investment or
project.

1.2. NPV Formula

 Syntax: =NPV(rate, value1, [value2], ...)

o rate: The discount rate over one period.
o value1, value2, ...: The series of cash flows (must include at least one positive
and one negative value).

1.3. Example

 Cash Flows: Initial investment of -$1000, followed by returns of $300, $400, $500, and
$600 over four years.
 Discount Rate: 10%

Step-by-Step Calculation:

1. Enter cash flows in cells A1 to A5: -1000, 300, 400, 500, 600.
2. Enter discount rate in cell B1: 0.10.
3. Enter formula in cell C1: =NPV(B1, A2:A5) + A1.

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Result Interpretation: A positive NPV indicates that the projected earnings (in present dollars)
exceed the anticipated costs, suggesting a profitable investment.

2. Internal Rate of Return (IRR)

Objective: Learn to calculate and interpret Internal Rate of Return.

2.1. Understanding IRR

 Definition: Internal Rate of Return (IRR) is the discount rate that makes the NPV of all
cash flows from a particular project equal to zero.
 Importance: Used to evaluate the attractiveness of a project or investment.
2.2. IRR Formula

 Syntax: =IRR(values, [guess])

o values: An array or a reference to cells that contain the numbers for which you
want to calculate the internal rate of return.
o guess: An initial guess at what the IRR will be (optional).

2.3. Example

 Cash Flows: Initial investment of -$1000, followed by returns of $300, $400, $500, and
$600 over four years.

Step-by-Step Calculation:

1. Enter cash flows in cells A1 to A5: -1000, 300, 400, 500, 600.
2. Enter formula in cell B1: =IRR(A1:A5).

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Result Interpretation: The IRR is the rate at which the net present value of the cash flows
equals zero. If the IRR is greater than the cost of capital, the investment is considered good.

3. Payment (PMT)

Objective: Learn to calculate loan payments.

3.1. Understanding PMT

 Definition: PMT calculates the payment for a loan based on constant payments and a
constant interest rate.
 Importance: Used to determine the monthly payment amount for loans or mortgages.

3.2. PMT Formula

 Syntax: =PMT(rate, nper, pv, [fv], [type])

o rate: The interest rate for each period.
o nper: The total number of payments for the loan.
o pv: The present value, or the total amount that a series of future payments is
worth now; also known as the principal.
o fv: The future value, or a cash balance you want to attain after the last payment is
made (default is 0).
o type: The timing of the payment (0 = end of the period, 1 = beginning of the
period; default is 0).
3.3. Example

 Loan Amount: $10,000

 Annual Interest Rate: 5%
 Loan Term: 5 years

Step-by-Step Calculation:

1. Enter loan amount in cell A1: 10000.

2. Enter annual interest rate in cell A2: 0.05.
3. Enter loan term in cell A3: 5.
4. Enter formula in cell A4: =PMT(A2/12, A3*12, A1).

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Result Interpretation: The result will be the monthly payment amount required to pay off the
loan within the specified term.

4. Future Value (FV)

Objective: Learn to calculate the future value of an investment.

4.1. Understanding FV

 Definition: FV calculates the future value of an investment based on periodic, constant

payments and a constant interest rate.
 Importance: Used to determine how much an investment will be worth in the future.

4.2. FV Formula

 Syntax: =FV(rate, nper, pmt, [pv], [type])

o rate: The interest rate for each period.
o nper: The total number of payment periods.
o pmt: The payment made each period; it cannot change over the life of the
investment.
o pv: The present value, or the total amount that a series of future payments is
worth now (optional; default is 0).
o type: The timing of the payment (0 = end of the period, 1 = beginning of the
period; default is 0).

4.3. Example

 Monthly Savings: $100

 Annual Interest Rate: 6%
  Saving Period: 10 years

Step-by-Step Calculation:

1. Enter monthly savings in cell A1: 100.

2. Enter annual interest rate in cell A2: 0.06.
3. Enter saving period in cell A3: 10.
4. Enter formula in cell A4: =FV(A2/12, A3*12, -A1).

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Result Interpretation: The result will be the future value of the monthly savings after the
specified period at the given interest rate.

5. Present Value (PV)

Objective: Learn to calculate the present value of an investment.

5.1. Understanding PV

 Definition: PV calculates the present value of an investment based on future payments.

 Importance: Used to determine the current worth of a series of future cash flows.

5.2. PV Formula

 Syntax: =PV(rate, nper, pmt, [fv], [type])

o rate: The interest rate for each period.
o nper: The total number of payment periods.
o pmt: The payment made each period; it cannot change over the life of the
investment.
o fv: The future value, or a cash balance you want to attain after the last payment is
made (optional; default is 0).
o type: The timing of the payment (0 = end of the period, 1 = beginning of the
period; default is 0).

5.3. Example

 Annual Interest Rate: 6%

 Periodic Payment: $100
 Saving Period: 10 years

Step-by-Step Calculation:

1. Enter periodic payment in cell A1: 100.

 2. Enter annual interest rate in cell A2: 0.06.
3. Enter saving period in cell A3: 10.
4. Enter formula in cell A4: =PV(A2/12, A3*12, -A1).

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Result Interpretation: The result will be the present value of the series of future payments.

6. Advanced Financial Analysis

Objective: Apply advanced financial analysis techniques using Excel.

6.1. Depreciation Functions

 SLN (Straight-Line Depreciation): Calculates depreciation of an asset for one period.

o Syntax: =SLN(cost, salvage, life)
 cost: Initial cost of the asset.
 salvage: Salvage value at the end of the asset's life.
 life: Number of periods over which the asset is depreciated.

Example:

 Initial cost: $5000

 Salvage value: $500
 Life: 5 years

Calculation:

 Enter =SLN(5000, 500, 5) to get the annual depreciation expense.

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 DB (Declining Balance Depreciation): Calculates depreciation of an asset using the

declining balance method.
o Syntax: =DB(cost, salvage, life, period)
 period: The period for which you want to calculate the depreciation.

Example:

 Initial cost: $5000

 Salvage value: $500
 Life: 5 years
 Period: 1 (for the first year)
Calculation:

 Enter =DB(5000, 500, 5, 1) to get the depreciation expense for the first year.

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6.2. Bond Functions

 PRICE: Calculates the price per $100 face value of a security that pays periodic interest.
o Syntax: =PRICE(settlement, maturity, rate, yld, redemption,
frequency, [basis])
 settlement: The security's settlement date.
 maturity: The security's maturity date.
 rate: The security's annual coupon rate.
 yld: The security's annual yield.
 redemption: The security's redemption value per $100 face value.
 frequency: The number of coupon payments per year.
 basis: The day count basis to use (optional).

Example:

 Settlement date: 01-Jan-2024

 Maturity date: 01-Jan-2034
 Annual coupon rate: 5%
 Annual yield: 6%
 Redemption value: 100
 Frequency: 2 (semi-annual)

Calculation:

 Enter =PRICE("01-Jan-2024", "01-Jan-2034", 0.05, 0.06, 100, 2) to get the

bond price.

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 YIELD: Calculates the yield on a security that pays periodic interest.

o Syntax: =YIELD(settlement, maturity, rate, pr, redemption,
frequency, [basis])
 pr: The security's price per $100 face value.

Example:

 Settlement date: 01-Jan-2024

 Maturity date: 01-Jan-2034
 Annual coupon rate: 5%
 Price: 95
 Redemption value: 100
  Frequency: 2 (semi-annual)

Calculation:

 Enter =YIELD("01-Jan-2024", "01-Jan-2034", 0.05, 95, 100, 2) to get the bond

yield.

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6.3. Investment Analysis

 XNPV: Calculates the net present value for a schedule of cash flows that is not
necessarily periodic.
o Syntax: =XNPV(rate, values, dates)
 values: Cash flow amounts.
 dates: Corresponding dates for each cash flow.

Example:

 Cash flows: -1000 on 01-Jan-2024, 300 on 01-Jan-2025, 400 on 01-Jan-2026, 500 on 01-
Jan-2027, 600 on 01-Jan-2028
 Discount rate: 10%

Calculation:

 Enter cash flows in cells A1 to A5: -1000, 300, 400, 500, 600.
 Enter corresponding dates in cells B1 to B5: 01-Jan-2024, 01-Jan-2025, 01-Jan-2026, 01-
Jan-2027, 01-Jan-2028.
 Enter discount rate in cell C1: 0.10.
 Enter formula in cell D1: =XNPV(C1, A1:A5, B1:B5).

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 XIRR: Calculates the internal rate of return for a schedule of cash flows that is not
necessarily periodic.
o Syntax: =XIRR(values, dates, [guess])
 values: Cash flow amounts.
 dates: Corresponding dates for each cash flow.
 guess: An initial guess at what the IRR will be (optional).

Example:

 Cash flows: -1000 on 01-Jan-2024, 300 on 01-Jan-2025, 400 on 01-Jan-2026, 500 on 01-
Jan-2027, 600 on 01-Jan-2028

Calculation:
 Enter cash flows in cells A1 to A5: -1000, 300, 400, 500, 600.
 Enter corresponding dates in cells B1 to B5: 01-Jan-2024, 01-Jan-2025, 01-Jan-2026, 01-
Jan-2027, 01-Jan-2028.
 Enter formula in cell C1: =XIRR(A1:A5, B1:B5).