IEDA 3230: Engineering Economy

Time Value of Money using Excel

Agenda

In these notes, we look at a few Financial functions available in MS Excel

 Present value of an annuity
A A A A A A

0 1 2 3 4 N-1 N
Excel: type 0 annuity

PV(rate, nper, pmt, [fv], [type])

rate: interest rate per period
an interest rate of 5% per period  rate = 0.05
nper: total number of payment periods in the annuity
pmt: payment made at the end of each period
pmt can be positive or negative; pmt is constant for each period
fv: future value, or the desired cash balance after the last payment is made
fv is an optional input, it may be omitted
type: indicates whether the payment is made at the end/start of each period
type = 0  payment is due at the end of each period
type = 1  payment is due at the beginning of each period
Present value of an annuity
A A A A A A

0 1 2 3 4 N-1 N

PV(rate, nper, pmt, [fv], [type])

Example:
Mr. Wong will deposit an amount in the bank at fixed rate of 3% per annum.
He wishes to withdraw equal amounts $43,000 at the end of each of the
next four years to pay for his daughter's fees. How much should he deposit?

PV( 0.03, 4, 43000, , 0)

Present value of a non-uniform flow at fixed interest

A1 A2 A3 AN-1 AN

0 1 2 3 4 N-1 N
A4

P Excel: non-uniform annuity

NPV(rate, A1 [, A2, …, ])
rate: interest rate per period
an interest rate of 5% per period  rate = 0.05
Ai: amount paid at the end of period i
 Future value of an annuity
P
A A A A A A

Excel: type 0 annuity 0 1 2 3 4 N-1 N

FV(rate, nper, pmt, [pv], [type])

rate: interest rate per period
an interest rate of 5% per period  rate = 0.05
nper: total number of payment periods in the annuity
pmt: payment made at the end of each period
pmt can be positive or negative; pmt is constant for each period
pv: (optional) amount of flow at the start of period 0
pv is an optional input, it may be omitted & may not be equal to pmt
type: indicates whether the payment is made at the end/start of each period
type = 0  payment is due at the end of each period
type = 1  payment is due at the beginning of each period
 Find the annuity given present &/or future value
P
A A A A A A

0 1 2 3 4 N-1 N

PMT(rate, nper, pv, [fv], [type])

rate: interest rate per period
an interest rate of 5% per period  rate = 0.05
nper: total number of payment periods in the annuity
pmt: payment made at the end of each period
pmt can be positive or negative; pmt is constant for each period
pv: amount of flow at the start of period 0
fv: (optional) amount of flow at the end of period nper
type: indicates whether the payment is made at the end/start of each period
type = 0  payment is due at the end of each period
type = 1  payment is due at the beginning of each period
Find the number of periods given PV &/or FV
P
A A A A A A

0 1 2 3 4 N-1 N

Find N, the number of periods for an investment, F

given the fixed periodic payments, the interest rate,
and the present and (optionally) future flows.
NPER(rate, pmt, pv, [fv], [type])
rate: interest rate per period
an interest rate of 5% per period  rate = 0.05
pmt: payment made at the end of each period
pmt can be positive or negative; pmt is constant for each period
pv: amount of flow at the start of period 0
fv: (optional) amount of flow at the end of period nper
type: indicates whether the payment is made at the end/start of each period
type = 0  payment is due at the end of each period
type = 1  payment is due at the beginning of each period
Summary

- Some of the common cash flow equivalencies are provided in Excel

as built-in functions
- More complex cash flow equivalencies can easily by programmed as
formulae or via VBA macros in Excel with little effort.

Acknowledgements:
1. Most of the lecture notes for this course are adapted from those of Prof Xiangtong Qi
2. Course text: Engineering Economy by Sullivan, Wicks, Koelling
3. You can find the description and examples for all these functions (and many more) at:
the Microsoft Office documentation page.

Next: Evaluating investments/projects (deterministic)