USING EXCEL TO SOLVE SPREADSHEET QUE

The following sheets show how you can use Excel to solve each of the spreadsheet questions on page xx. We

Cell addresses vs numbers

Suppose that you want to add 4 and 5 in Excel. There are two ways to do so:
Method 1: If you enter "= 4 + 5" in any cell, you should see the answer 9.
Method 2: The alternative is to enter the number 4 in a cell (say, cell A1) and the number 5 in another cell (sa
The cell will show the result of adding the numbers in cells A1 and A2.

In all our worked examples we will use method 2. In other words we will refer to addresses that contain the
since it is then easy to change one of the inputs. However, you will get exactly the same results if you substit

Formulas vs. Excel functions

To solve each problem, you can either use the basic formulas for valuing cash flows, or you can use the built-
the calculations both ways. Remember in both cases to start your instruction with an "=" sign to alert Excel t

Excel functions
In these examples we will use the following Excel functions:
Fv(Rate, Nper, Pmt, Pv, Type) finds the future value (Fv) of a series of regular payments (Pmt) and/or a prese
Pv(Rate ,Nper, Pmt, Fv, Type) finds the present value (Pv) of a series of regular payments (Pmt) and/or a futu
PMT(Rate, Nper, Pv, Fv, Type) finds the regular payment (Pmt) needed to produce a given present, and/or fu
NPER (Rate, Pmt, Pv, Fv,Type) finds the number of periods (Nper) that are needed for a series of payments to

Notice that, if the payments occur at the beginning of each period, you need to enter 1 for Type. Otherwise

Excel abbreviations
Note:
Some of the abbreviations used in the Excel functions are different from those used in Principles of Corporate
Our abbreviation Excel
Number of periods t nper
Interest rate r rate
Cash flow per period C pmt

Sign conventions
Excel functions interpret cash inflows as positive numbers and outflows as negative numbers. For example, i
the answer will be shown as a negative number (i.e., Excel will show that you need to set aside money today
little common sense will be enough to interpret your answer. For convenience, in the following examples we

Locating Excel functions

If you cannot remember the Excel function, you can pull down the function from Excel's built-in functions, an
Locating these functions depends on the version of Excel. They can usually be accessed by clicking on fx belo
accessed by clicking the Formulas command on the main toolbar.
Changing inputs
In the worked examples you can change any of the inputs shaded green. The answers using the Excel functio
basic formulas will continue to show the answer to the original problem.
SPREADSHEET QUESTIONS

uestions on page xx. We start with some brief notes on using Excel.

mber 5 in another cell (say, cell A2). Then in a third cell you can enter =A1 + A2.

resses that contain the numbers in the problem. This is generally good practice
me results if you substitute the numbers themselves rather than the addresses.

or you can use the built-in functions that Excel provides. We show you how to do
"=" sign to alert Excel that you are asking it to do a calculation.

nts (Pmt) and/or a present value (Pv)

nts (Pmt) and/or a future value (Fv)
iven present, and/or future value
a series of payments to provide a given present, and/or future, value

1 for Type. Otherwise enter 0 or leave Type blank.

n Principles of Corporate Finance:

umbers. For example, if you use the Excel function to find the present value of $100,
set aside money today to receive $100 in the future.) This can be confusing, but a
e following examples we have signed inputs so that the output is always positive.

el's built-in functions, and you will be prompted for the necessary inputs.
ed by clicking on fx below the toolbar. In later versions they can also be
s using the Excel functions will change, but the calculations using the
 Question 1: The Medici Bank loan

What would 218 thousand Milanese pounds accumulate to after 3 years if the i

We have entered the data you need in cells H7 to H9::

Present value (PV) 218
Number of periods (t) 3
Interest rate (r ). 0.154

You can either find the answer using the formula for the future value or you ca
built-in function for future values. Here is what you need to enter and the resu

Using the formula for the future value

Future value formula: FV =PV x (1+r)t

You need to enter: =H7*(1+H9)^H8
Output: 335

Using the Excel future value function

Function: Fv(Rate, Nper, Pmt, Pv, Type)

You need to enter: =Fv(H9,H8,0,-H7)
Output: 335

Notice: In this problem Pmt (the value of any regular payment) is zero.
Since the payment occurs at the end of the period, leave Type blan

If you cannot remember the Excel function, you can pull down the present valu
Excel's built-in functions. The box below shows how you enter the inputs when

Function Arguments

FV
Rate H9 = 0.154

Nper H8 = 113

Pmt 0 = 0

Pv -H7 = -218

Type
= 335
Returns the future value of an investment based on periodic,
constant payments and a constant interest rate.
Formula result = 335

Help on the function OK Cancel

Medici Bank loan

ate to after 3 years if the interest rate is 15.4%?

he future value or you can use Excel's

eed to enter and the resulting output.

ular payment) is zero.

e period, leave Type blank

ull down the present value function from

you enter the inputs when prompted.

d on periodic,
Cancel
 Question 2: Revised forecasts for your offi

Your adviser has produced revised figures for your office building. It is forecast to produce a cash
$850,000 in year 2, when you come to sell it. If the cost of capital is 12%, what is the value of the

Here are the data you need:

Year
1 2
Cash flows (Ct) 40,000 850,000

Interest rate (r ) 0.12

You can either find the answer using the formula for the present value of each payment or you can
built-in function for present values. Here is what you need to enter and the resulting output:

Using the formula for the present value

Year
1 2
Present value formula: C1 / (1+r) + C2 / (1+r)2
You need to enter: =H11/(1+$H$13)^H10 =J11/(1+$H$13)^J10
Output: 35,714 677,615

Using the Excel present value function

Year
1 2
Function: PV(Rate, Nper, Pmt, Fv, Type)
You need to enter: =PV($H$13, H10, 0,-H11) =PV($H$13, J10, 0,-J11)
Output: 35,714 677,615

Notice: In this problem, PMT (the value of any regular payment) equals zero.
Since the payment occurs at the end of the period, leave Type blank.
Also, note that we enter the future cash flow (FV) as a negative number.
This makes the output of the PV function a positive number.

If you cannot remember the Excel function, you can pull down the present value function from
Excel's built-in functions. The box below shows how you enter the inputs for the year 2 payment w

Function Arguments x

Pv
Rate H13 = 0.12
 nper J10 = 0

Pmt 0 = 0

FV -J11 = 0.00

Type
= 677,615
Returns the present value of an investment based on periodic,
constant payments and a constant interest rate.

Formula result = 677,615

Help on the function OK Cancel

orecasts for your office building

orecast to produce a cash flow of $40,000 in year 1, but only

%, what is the value of the building?

f each payment or you can use Excel's

the resulting output:

SUM
= PV
1/(1+$H$13)^J10 =I24+N24
713,329

SUM
e)
V($H$13, J10, 0,-J11) =I32+N32
713,329

tive number.

ent value function from

ts for the year 2 payment when prompted.
 Question 3: Valuing a truck lease

A company can lease a truck for 6 annual payments of $10,000 (paid at the end of each year). If the inter
what is the present value of these payments?

We have entered the data you need in cells H9 to H11:

Payment per year, $ (C) 10000
No. of years (t) 6
Interest rate (r ) 0.060

You can either find the answer using the formula for the present value of an annuity or you can use Excel
built-in function for present values. Here is what you need to enter and the resulting output.

Using the annuity formula

Annuity formula: PV = C(1/r - 1/(r(1 + r)t)).
You need to enter: H9*(1/H11-1/(H11*(1+H11)^H10))
Output: 49,173.24

Using the Excel present value function

Function: PV(Rate, Nper, Pmt, FV, Type)
You need to enter: =PV(H11,H10,-H9,0)
Output: 49,173.24

Notice: In this problem Fv (the future value) is zero or blank.

Since the payments occur at the end of the period, leave Type blank

It may seem clumsy, but it can also be equally efficient to value each payment in an annuity separately an
type the formula for the value of the first payment and then use the copy command to repeat the formu

If you cannot remember the Excel function, you can pull down the present value function from
Excel's built-in functions. The box below shows how you enter the inputs when prompted.

Function Arguments x

Pv
Rate H11 = 0.060

nper H10 = 6

Pmt -H9 = -10000

 FV 0 = 0.00

Type
= 49,173.24
Returns the present value of an investment based on periodic,
constant payments and a constant interest rate.

Formula result = 49,173.24

Help on the function OK Cancel

 uing a truck lease

of each year). If the interest rate is 6%,

nuity or you can use Excel's

sulting output.

n an annuity separately and then add them up. You just

mand to repeat the formula for the remaining payments.

e function from
n prompted.
 Question 4: The return on Ford stock

Ford Motor stock was priced at $6.08 in December 2019. Six months later the price was
What was the annual rate of return?

We have entered the data you need in cells H9 to H11::

Present value (PV) 6.08
No. of years (t) 0.5
Future value (FV) 8.79

You can either find the answer using the formula for the future value or you can use Exce
built-in function for future values. Here is what you need to enter and the resulting outp

Using the formula for the present value

Present value formula: PV =FV / (1+r)t. Therefore r = (FV/PV)(1/t) - 1

You need to enter: =(H11/H9)^(1/H10)-1
Output: 1.0901 or 109.01%

Using the Excel interest rate function

Function: Rate(Nper, Pmt, Pv, Fv, Type)

You need to enter: =Rate(H10,0,-H9,H11) - 1
Output: 1.0901

Notice: In this problem Pmt (the value of any regular payment) is zero.
Since the payment occurs at the end of the period, leave Type blank

If you cannot remember the Excel function, you can pull down the present value function
Excel's built-in functions. The box below shows how you enter the inputs when prompte

Function Arguments x

RATE
Nper H10 = 0.5

Pmt 0 =0

Pv -H9 = -6.08

Fv H11 =9

Type
 = 1.0901
Returns the interest rate per period of a loan
or an investment.

Formula result = 1.0901

Help on the function OK Cancel

 on Ford stock

onths later the price was $8.79.

value or you can use Excel's

er and the resulting output.

eave Type blank

he present value function from

he inputs when prompted.
 Question 5: Double your money

An investment adviser has promised to double your money. If the interest rate is 7%
many years will she take to do so?

We have entered the data you need in cells H9 to H11:

Present value (PV) 1
Future value (FV) 2
Interest rate (r ) 0.06

You can use the present value formula to value an annuity

You can either find the answer by taking logs of the present value formula or you can
built-in function for number of periods. Here is what you need to enter and the resu

Using the formula for the present value

Present value formula: PV =FV / (1+r)t. So t = ln(FV/PV)/ln(1+r)

You need to enter: =ln(h10/h9)/ln(1+H11)
Output: 11.90

Using the Excel function for number of periods

Function: NPER(Rate, Pmt, Pv, Fv, Type)

You need to enter: =NPER(H11,0,H9,H10)
Output: 11.90

Notice: In this problem Pmt (the value of any regular payment) is zero.
Since the payment occurs at the end of the period, leave Type blank

If you cannot remember the Excel function, you can pull down the present value func
Excel's built-in functions. The box below shows how you enter the inputs when prom

Function Arguments x

RATE
Rate H11 = 0.06

Pmt 0 = 0

Pv -H9 = -1
 Fv H10 =2

Type
= 11.90
Returns the number of periods for an investment based on
periodic, constant payments and a constant interest rate.

Formula result = 11.90

Help on the function OK Cancel

 e your money

y. If the interest rate is 7% a year, how

nt value formula or you can use Excel's

need to enter and the resulting answer.

payment) is zero.
iod, leave Type blank

own the present value function from

nter the inputs when prompted.
 Question 6: Home Mortgages

A 30-year mortgage with annual payments has a present value of $200,000. What is th
rate is 8% per year?

We have entered the data you need in cells H9 to H11:

Present value, $ (PV) 200,000
No. of periods (t) 30
Interest rate (r) 0.08

You can either find the answer using the formula for the present value of each paymen
built-in function for regular payments. Here is what you need to enter and the resultin

Using the annuity formula

Annuity formula: PV = C(1/r - 1/(r(1 + r)t)). Therefore C = PV/(1/
You need to enter: =H9/( 1/H11 - 1/(H11*(1+H11)^H10) )
Output: 17,765

Using the Excel function for Pmt

Function: PMT(Rate, Nper, PV, FV, Type)
You need to enter: =PMT(H11,H10,-H9,0)
Output: 17,765

Notice: In this problem Fv (the value of any final extra payment) is zero.
Since the payments occur at the end of the period, leave Type blank

If you cannot remember the Excel function, you can pull down the present value functi
Excel's built-in functions. The box below shows how you enter the inputs when promp

Function Arguments

Pmt
Rate H11 = 0.08

nper H10 = 30

Pv -H9 = 100,000

FV 0 = 0

Type
= 17,765
Calculates the payment for a loan based on constant payments
and a constant interest rate.

Formula result = 17,765

Help on the function OK Cancel

6: Home Mortgages

alue of $200,000. What is the annual payment if the interest

resent value of each payment or you can use Excel's

eed to enter and the resulting output.

+ r)t)). Therefore C = PV/(1/r - 1/(r(1 + r)t))

H11*(1+H11)^H10) )

PV, FV, Type)

H9,0)

extra payment) is zero.

he period, leave Type blank

own the present value function from

nter the inputs when prompted.

x
nstant payments

Cancel
 Question 7: Calculating the effective annual interest rate

Second National Bank pays 6% interest compounded monthly. What is the effective annual interest rate?

We have entered the data you need in cells K8 and K9:

Interest rate (r ) 0.06
Number of compounding periods per year (npery) 12

You can either find the answer by using the formula for the effective rate or you can use Excel's
built-in function for the effective rate. Here is what you need to enter and the resulting output.

Using the formula for the effective interest rate

Formula: rate = [1 +(r/m)]^m -1

You need to enter: = (1+Kk8/K9)^K9-1
Output: 0.0617

Using the Excel function for the effective interest rate:

Function: EFFECT(nominal_rate, npery)

You need to enter: =EFFECT(K8,K9)
Output: 0.0617

If you cannot remember the Excel function, you can pull down the effective rate function from
Excel's built-in functions. The box below shows how you enter the inputs when prompted.

Function Arguments

EFFECT
Nominal_rate K8 = 0.06

npery K9 = 12

= 0.0617
Returns the effective annual interest rate

Formula result = 0.0617

Help on the function OK

 annual interest rate

ective annual interest rate?

ou can use Excel's

resulting output.

te function from
n prompted.

Cancel
 Question 8: Calculating the annual nominal interest rate

What monthly compounded rate would Second National Bank need to pay to provide an effective rate of 6.2

We have entered the data you need in cells K8 and K9:

Effective rate (Effect_rate) 0.062
Number of compounding periods per year (npery) 12

You can either find the answer by rearranging the formula for the effective rate or you can use Excel's
built-in function for the effective rate. Here is what you need to enter and the resulting output.

Rearranging the formula for the effective interest rate gives

Formula: r = m*((1 + effect_rate)^(1/m)-1)

You need to enter: = (K9*((1+K8)^(1/K9)-1))
Output: 0.06030

Using the Excel function for the effective interest rate:

Function: NOMINAL(Effect_rate, npery)

You need to enter: =NOMINAL(K8,K9)
Output: 0.06030

If you cannot remember the Excel function, you can pull down the nominal rate function from
Excel's built-in functions. The box below shows how you enter the inputs when prompted.

Function Arguments

NOMINAL
Effect_rate K8 = 0.062

npery K9 = 12

= 0.0603
Returns the annual nominal interest rate

Formula result = 0.06030

Help on the function OK Cancel

minal interest rate

ovide an effective rate of 6.2%?

or you can use Excel's

esulting output.

function from

Cancel