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EXCEL BASED FINANCIAL

PLANNING

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 Time Value of Money
1. Future value (FV) of a single cash flow
2. Present value (PV) of a single cash flow
3. FV of annuity
4. PV of annuity
5. Calculating payments
6. Calculating rate
7. Retirement planning
8. Constant perpetuity
9. Growing perpetuity
10.Growing annuity
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 Time Value of Money
As individuals we often take decisions to save money
for a future need or borrow money for current
consumption. To take these decisions we need to
calculate the amount of money we need to invest, if
we are saving or the cost of borrowing, if we are
applying for a loan.

To carry out the above tasks we need to understand

the time value of money.

Why do we believe that Money has time Value?

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 1. Future value (FV) of a single cash flow
YEAR 2014 2020

Money deposited in bank/

Nifty ETFin2014 will be of
what value in 2020
`
Note: No recurring payments
are made

Definitions:
PRESENT VALUE (PV)= A single amount invested at time=0
FUTURE VALUE (FV)=Value of money deposited at some time in future

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 1. Future value (FV) of a single cash flow
– Application
Example 1: If you deposit Rs. 100 for 10 years at an interest of 8%
per year compounded annually. How much money will you have at
the end of 10 years?
Excel solution: =FV(rate,nper,pmt,pv,type)
RATE: Rate of interest PMT: To Remember: PMT =
per period Installment amount
An equal amount of money
NPER: number of periods. invested at equal intervals
To Remember: Number of
times you will receive PV: A single amount invested at
interest time=0

TYPE: Required only when

PMT is made

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 1. Future value (FV) of a single cash flow
– Application
Example 1: You win a lottery of Rs. 100 and invest it in a 10 year fixed deposit
scheme with ICICI bank at an interest of 8% per year compounded annually.
How much money will you have at the end of 10 years?

Excel solution = FV(rate,nper,pmt,pv,type)

Compounded annually means interest is paid once in a year, therefore one

period is 1 year
Rate (Rate of return per period) = 8%
Number of periods = 10
PMT = 0 (as no recurring payment)
PV = -100 (since it is cash outflow)
TYPE= not required (as Type is required only when payment is made)

Solution:
=FV(8%,10,0,-100)

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 1. Future value (FV) of a single cash flow
– Application
Example 2: You win a lottery of `100 and invest it in 10 year fixed deposit
scheme with ICICI bank at an interest of 8% per year compounded semi-
annually. How much money will you have at the end of 10 years?

Excel solution = FV(rate,nper,pmt,pv,type)

Compounded semiannually means interest is paid twice in a year, therefore one

period is 6 months
Rate (Rate of return per period) = 8% / 2 = 4%
Number of periods = 10*2 = 20
PMT = 0 (as no recurring payment)
PV = -100 (since it is cash outflow)
TYPE= not required (as Type is required only when payment is made)

Solution:
=FV(4%,20,0,-100)

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 1. Future value (FV) of a single cash flow
– Application
Example 3: You win a lottery of `100 and invest it in 10 year fixed deposit
scheme with ICICI bank at an interest of 8% per year compounded quarterly.
How much money will you have at the end of 10 years?

Excel solution = FV(rate,nper,pmt,pv,type)

Solution:
=FV(2%,40,0,-100)

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 1. Future value (FV) of a single cash flow
– Application
Example 4: My son is 1 year old today, I plan to get him enrolled in a B-School
after 25 years. Cost of MBA today is 15 lacs. What will be cost of MBA after 25
years?

Excel solution = FV(rate,nper,pmt,pv,type)

Assuming Inflation = 6%

Solution:
=FV(6%,25,0,-15)

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 Frequency of Compounding
Effect of Compounding on FV of Rs.1

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2. Present value (PV) of a single cash flow
YEAR 2014 2020
How much money should you
deposit/invest today (one time) to
accumulate a certain amount at
some point in the future
`
Note: No recurring payments
are made

Definitions:
PRESENT VALUE (PV)= A single amount invested at time=0 (today)
FUTURE VALUE (FV)=Value of money deposited at some time in future

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2. Present value (PV) of a single cash flow
– Application
Example 1: My son is 1 year old today, I plan to get him enrolled in a B-School
after 25 years. Cost of MBA today is 15 lacs. We have already calculated the FV
of 15 lacs is 64.38 lacs. What is the amount of money I need to deposit/Invest
today (1 time payment) to accumulate the required amount after 25 years?
a) In bank
b) In Nifty ETF
c) In Junior Nifty ETF

Excel solution = PV(rate,nper,pmt,FV,type)

Assuming Bank rate = 8% p.a.
Nifty ETF return = 15% p.a.
Junior Nifty ETF = 17% p.a.

Solution: a)
=PV(8%,25,0,6438000)

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 3. FV of annuity
Definitions:
Annuity: Series of equal amount of payments at equal intervals of time

ANNUITY

ANNUITY ORDINARY
DUE ANNUITY

BEGINING ENDING

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 3. FV of annuity
ANNUITY Definitions:
Series of equal amount of payments at equal intervals of time. But the
DUE
first payment is made at the beginning of the first period
Note: 1st payment
made at the beginning
of 1st period

TIME 1st 2nd 3rd 4th 5th

Period B Period B Period B Period B Period B

If these are annual payments, this will be called as a 5 year annuity due (since there are 5 payments)
If these are monthly payments, this will be called as a 5 month annuity due
And so on..

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 3. FV of annuity
ORDINARY Definitions:
Series of equal amount of payments at equal intervals of time.
ANNUITY
But the first payment is made at the end of the first period

Note: Payment is The first payment is made after 1 period from today
made at the end (Planning starts today, but first payment is made later)
of 1st period which can be an year, month , day. etc

TIME 1st 2nd 3rd 4th 5th

Period E Period E Period E Period E Period E
If these are annual payments, this will be called as a 5 year ordinary annuity
If these are monthly payments, this will be called as a 5 month ordinary annuity
And so on..e end

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 3. FV of annuity – Ordinary annuity
What is the amount that I would have at the end of the 5th Period (Year, Month, etc) if I
invest / deposit a fixed amount of money at the end of every year for five consecutive
years?

5th
TIME 1st 2nd 3rd 4th 5th Period E
Period E Period E Period E Period E Period E

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 3. FV of annuity –Annuity due
What is the amount that I would have at the end of the 5th Period (Year, Month, etc) (to
make ordinary and annuity due comparable on the same future date), if I invest / deposit a
fixed amount of money at the beginning of every year for five consecutive years?

5th
TIME 1st 2nd 3rd 4th 5th Period E
Period B Period B Period B Period B Period B

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 3. FV of annuity – Ordinary annuity
Example 1: If I deposit Rs.5,000 every year in bank for 5 consecutive years,
beginning one year from now, calculate the amount of money I would have
at the end of 5th year
a) Assuming bank rate = 8% per annum

Excel solution = FV(rate,nper,pmt,PV,type)

Solution:
=FV(8%,5,5000,0,0)

Type: Type is “0” for ordinary annuity and “1” for annuity due

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 3. FV of annuity – Ordinary annuity
Example 2: If I deposit Rs.5,000 every month in bank for 5 years, beginning
one month from now, calculate the amount of money I would have at the
end of 5th year
a) Assuming bank rate = 8% per annum

Excel solution = FV(rate,nper,pmt,PV,type)

Solution:
=FV(8%/12,5*12,5000,0,0)

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 3. FV of annuity – Ordinary annuity
Example 3: If a 20 year plans to invest Rs.1,00,000 at the end of every
year(first payment to be made 1 year from today) till he is 60 (last payment
at 60). What is the amount money he/she would have accumulated when he
turns 60?
a) Deposited in PPF at the rate of 8.5% p.a
b) Invested in Nifty (assume a return of 15% p.a)

Solution
a) =FV(8.5%,40,100000,0,0)
b) = FV(15%,40,100000,0,0)

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 3. FV of annuity – Ordinary annuity
Example 4: If a 20 year old plans to invest 10,000 per month (first payment
to be made 1 month from today) till he turns 60 (last payment at 60). What
is the amount of money he/she would have accumulated when he turns 60?
a) Deposited in PPF at the rate of 8.5% p.a
b) Invested in Nifty (assume a return of 15% p.a)

Solution:
a) =FV(8.5%/12,40*12,10000,0,0)
b) =FV(15%/12,40*12,10000,0,0)

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 4. PV of annuity – Ordinary annuity
`

1st 2nd 3rd 4th 5th

Period E Period E Period E Period E Period E

Withdrawals

TIME 1st
Period B

What is the amount of money

to be deposited/invested
today so that one can withdraw
a certain amount every period?

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 4. PV of annuity – Ordinary annuity
Example 1: Assuming I am 60 (just retired) today and my monthly expenses
can be met with Rs.1,00,000. From the end of this month I would require
Rs.1,00,000 every month till I am 90 years old. What is the amount of
money I need to deposit in the bank today that allows me to withdraw
1,00,000 every month till I turn 90? (Assume the bank balance when I turn
90 will be 0)

Solution:
a) =PV(8%/12,30*12,-100000,0,0)

Calculating Insurance cover

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 4. PV of annuity – Ordinary annuity
Example 2: A family’s monthly expenses are Rs 50,000. The only earning
member of the family wants to take an life insurance that pays his family Rs
50,000 every month for 10 years in case of earning member’s death. What
is the life insurance cover required to meet this requirement? Consider this
as an ordinary annuity

Solution:
a) =PV(8%/12,10*12,-50000,0,0)

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 5. Calculating payments
Example 1: My son is 1 year old today, I plan to get him enrolled in a B-
School after 25 years. Cost of MBA today is 15 lacs. What is the amount of
money I need to deposit/Invest every month (end) for 25 years to
accumulate the required amount?
a) Deposit in bank
b) Invest in niftybees

=PMT(rate,nper,PV,FV,type)

Solution:
a) =PMT(8%/12,25*12,0,6438000,0)
b) =PMT(15%/12,25*12,0,6438000,0)

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 6. Calculating Rate
Example 1: Sensex in 1980 was trading at 100. if you invest an amount in
1980 and hold that investment till today (for 34 years) when sensex is
25000. What is CAGR (the rate of return every year)

Solution:
=rate(34,0,-100,25000)

Example 2: Sensex in 2003 was trading at 4000 at today in 2014 it is trading

at 25,000. Calculate CAGR

Solution:
=rate(11,0,-4000,25000)

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 6. Calculating Rate
Example 3: I have started investing with Rs 10,000 and wish to accumulate
Rs 1 cr in next 20 years. What is the required Compounded annual growth
rate (CAGR) – the required rate of return every year ?

Solution:
=rate(20,0,-10000,10000000,0,30%)

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 7. Retirement planning
Example 1: I am a 20 year old, my monthly expenses are Rs.1,00,000 per
month. I will retire at the age of 60. Life expectancy is 90 years. What is the
amount of money that I need to deposit/invest every month in bank/nifty
ETF (starting one month from now, till the age of 60) to accumulate the
required retirement corpus that would be sufficient to meet my needs for the
age of 60 to 90
Assumption: the retirement corpus would be kept in the bank

Solution: The solution is divided into three parts:

a) Calculating my monthly expenses from 60 – 90
=FV(6%,40,0,100000)
b) Calculating the PV of an ordinary annuity, from 60 – 90
=PV(8%/12,30*12,1028000,0,0)
c) Calculating payments to be made in the bank to accumulate
Rs.14,00,00,000 by 60
=PMT(8%/12,40*12,0,140000000,0)

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 7. Retirement planning
c) Calculating payments:
ii. In the nifty ETF to accumulate Rs.14,00,00,000 by 60
=PMT(15%/12,40*12,0,140000000,0)

How to reduce these monthly payments further?

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 8. Constant perpetuity
Example 1: You decide to give Rs.10,00,000 every year, starting one year
from now till eternity. What is the amount of money you should deposit in the
bank to meet this requirement. Assuming bank rate = 8%

Solution:
PV of a constant Perpetuity = PMT/r ; 1000000/0.08 = 12500000

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 9. Growing perpetuity
Example 1: You decide to give Rs.10,00,000 every year, starting one year
from now till eternity. You want this annual payment to grow every year by
6% (that takes care of inflation). What is the amount of money you should
deposit in the bank to meet this requirement. Assuming bank rate = 8%

Solution:
PV of a constant Perpetuity = PMT/(r-g) ; 1000000/(0.08-0.06) = 50000000

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 10. Growing annuity
Example 1: Assuming I am 60 (just retired) today and my monthly expenses
can be met with Rs.1,00,000. From the end of this month I would require
Rs.1,00,000 every month till I am 90 years old. This monthly requirement
will go on increasing every month by 0.5%. What is the amount of money I
need to deposit in the bank today that allows me to withdraw Rs.1,00,000,
in the first month, with a 0.5% increase in these withdrawals every
subsequent month till I turn 90? (Assume the bank balance when I turn 90
will be 0)

Solution:
a) =PV((8%-6%)/12,30*12,-100000,0,0)

Calculating Insurance cover

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