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22 views10 pagesFinancial Management Practical Note
financial mgt practical note
Uploaded by
Roshan kumarCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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/ 10
EXCEL APPLICATIONS IN
TIME VALUE OF MONEY ae
COMPOUNDING TECHNIQUE (THE FUTURE VALUE FUNCTION):
Ort is given by:= FV(RATE, NPER, PMT, [PV], [TYPE])
' we = Rate of Interest
pER =No of periods for an investment based on interest rate
ised in case of constant payments to be made and a constant rate of interest
‘resent value of the investment
ayment made at the end of the period
Payment made at the beginning of the period
4, Future Value of a Single Present Cash Flay
roblem 1: ims uate het et compe
at is the amount that he will get al end of 3 years?
Solution: Steps:
| Prepare the excel sheet by entering the given information in excel sheet in column B and C.
», To find out the future value of this investment, enter the built-in FV function in Excel Sheet
‘o get a positive value, we always put a negative sign in front of the PV (C3) in the
function. pa eae
Alternatively, instead of using a negative sign in the function, we can use PV as ~10000 in
cell C3. =a
page Layout Formulae” Data Review Vie
TeV wesc.)
sh eee
de
Present Value
[Year
NPER
FV of asingle
‘cash flow
13310 e Introduction to Financial Management
1.2 Future Value of a series of unequal cash flows: \~@¥
Problem 2; Mr. X invested & 10,000, & 5,000 and % 2,000 at:
ie compounded value of his investment at the end of 3" y
10% compounded annually.
1*,2"4, and 3"4 year. Calculate
when interest is provided at the rate of
Solution: Steps: j
1. Enter the given information in excel sheet; in column B and C and the rate of interest in cell EI,
Line Callout 11 Ca fl
a oe ae ee FE
1 soLuTioN Rate of Interest 10%
2 | }
3 Year [cash inflows |
4 a 0
5 a[__. 10000
6 2 5000]
7 3 2000|
[3 | |
2. Find out the future value of each of the cash inflows by using the built-in FV function in Excel
Sheet corresponding to each of the cash inflows in column D.
Note: If the same value from a cell is used again and again in the formula (such as rate of
interest), freeze the value by pressing FA (which will give a dollar sign to the cell as $E$1)
and then use the dragging down utility in excel.
ton a ae
3000 |=FV(SES1,$897-1,0,-C50)
2000 -EV(SES1 S887-2,0,-C7,0)
=FV{Rate,NPER,PMT,[FV},[TYPE}) ure Value of a series of equal cash fl otal 2
13: Mr. X has invested an amount of €10, each attend st 2nd and SS Cale
ound value of his investment at the end of 3rd year: "interest is provided at a rate of I
annually. = 4
the excel sheet by entering the given information in excel sheet in column ana 7
‘This time the PMT is taken as the negative value to get a positive value in the
=
|
3 § Introduction to Financial Managemen
#14. Future Value when compounding is more than once in a year
Problem 4: Mr. Xhas invested ® 10,000 now for3 years atthe interest rate of 10% per annum
semiannually, Find the amount he will! get fer
3 years. Also, calculate the future value if compounding is done: (i) Quarterly (ii) Monthly”
Solution: Since the compounding is more than once in a year, the effective rate of interest will be
different from the actual rate of interest given on per annum basis.
1. Enter the given information in excel sheet in column A, B and C.
Date
Home nied Pagelayout Formulas
| Payment made semi-
| lannually
30000
82/2
@ [NPER poz
9 Pwr °
[30/
2. Adjust the rate of interest and NPER (no. of payments made during the period of investment)
as per semi-annual payments. Hence, the rate of interest becomes half of 10% and the NPER
becomes double due to payments made half yearly.
3. The built-in FV function is used in cell C12 to find out the future value as & 13400.96.
12 Fut z =FV(CO,C8,C9,-C5,0)
i 1340.96 Applications in Time Value of Money
_ Similarly, to find out future values for com; yi
tothe rate of interest and NPER for quarterly basis and monthly basis r
oe 2
4 : =FV(G6,68,G9,-G5,0)
| eel enti
[Payment made
semi
10000
822 7
a
72 3K
°
FV(C6,€8,09,-5,0)
3400.96
lem 5: Mr. X has invested 10,000 now for 3 years at the interest rate of 12% per annum
ded quarterly. Find theamounthe will get after3 years.
fe Value is found out in the same manner but putting the built-in FV function
oo fe | =FV(C4,C6,C7,-C3,0)
"Rate ofinterest _-12%
- [Present value
Year S Introduction to Financial Management
@prscountine TECHNIQUE- THE PRESENT VALUE FUNCTION
The PV function is given by: = PV(RATE, NPER, PMT, [FV], [TYPE])
Rate =Rate of Interest
NPER = Noofperiods for an investment based on interest rate
PMT = Used in case of constant payments to be made and a constant rate of interest
- = Future value of the investment
TYPE: 0= Payment made at the end of the period
TYPE: 1= Payment made at the beginning of the period
2:1, Present Value of a Future Sum
Problem 6: Mr. X is supposed to get ¥ 10,000 after 3 years. Let the existing rate of interest is 10%, find
the present value of this sum.
Solution: Steps:
1. Prepare the excel sheet by entering the given information in column B and C.
[Future Value (FY) 10000
Years 3
INPER 2
Rate 10%
2. Put the built-in PV function in Excel Sheet in cell C9.
= GN im PVCT,C50-C4,
peviercs.0-cad)
__[P¥Gvate, per, pmt, [fv] Itypel) |
7513.15 answer
Note: To get a positive value, we always put a negative sign in front of the FV (C4) in the
| Alternatively, instead of using a negative sign in the function, we can enter FV as -10000
in cell C4. 4 Applications in Time Value of M
present Value of a Series of Unequal C;
=npwio2.8a8eb | Se
Re vrate, value, [value7L (valuesT,
14725.77 Answer
eS eee
sent value.
the built-in NPV function as given in cell B9 and get thenet pre
tively, Steps: 1. Same as above
2 Find out the present value fr each corresponding cash inflows Py
asin column C.
"3, Find the sum of al the present values till the end o|
TE] =Pvis032,04,0,-04.0).
T €
‘using the built-in PV function
£3" year
Rate of interest 2
[cash inflows _|PV
year
0000 -ovis0$2,88,0-84.)
2 5000 =PV(S082.A5 0-85.)
3. (2000 _=PV($DS2,A6,0,-B6,0)
-sum(ccs) 10 Introduction to Financial Managemen
2| [Rate of interest] 10%6|
3 Year [cash inflows _|pv
ce a 10000 9090.92
5 2 5000 4132.23
6 3 2000,
z
The present value of all his investment is€ 14,725.77
23,Present Value of a Series of Equal Cash Flows
Problem 8: Mr.X wishes tocalculate the present value of the annuity consisting ofa cash inflow of 10,009
per year for3 years. The rate of interest he can earn is 10%.
Solution: Steps:
1. Enter the given information on the excel sheet with regard to rate of return, PMT, NPER and year,
2. Find the present value by using the PV function.
Present value [=PV(C6,C5,-C7,C3,0)__24868.52
_[Ritete apes, pmt typed)
2.4. Present Value of Perpetuity
ree
Perpetuity is defined as an infinite series of equal cash flows occurring at regular intervals of time. To
find the present value of perpetuity, divide the annuity by the rate of interest.
For more clarity, refer to the following illustration:
Problem 9: Mr. X, a wealthy businessman wants to institute a scholarship of % 10,000 p.a. for an
‘outstanding academic performance in an educational institution. He wants to know the sum of money
he has to invest at 10% rate of interest so that it yields € 10,000 p.a. in perpetuity. sg applicatons in Time Value of Money