Financial Functions and Calculations
Financial Functions and Calculations
Financial Functions and Calculations
7.1 Introduction
In engineering design applications, different economic alternatives must frequently be
investigated. Excel offers over 50 built-in nancial functions that may be employed for
such investigations. We shall now give examples of calculations based on some of these
functions. First, we de ne the nomenclature employed in the syntax statements of the
Excel functions and see how they relate to some elementary compound interest formulas.
7.2 Nomenclature
fv This is the future value an investment may have after all payments have been
made or accrued, including an initial payment.
nper This is the number of periods that investment payments are made. The peri-
ods may be uniform or nonuniform in time and may be speci ed in terms
of days, months, years, or the time between speci c dates. This term is often
designated by the symbol n.
pmt This is the periodic payment to or from an investment medium. The payment
may be constant or variable with time.
pv This is the present value of a set of future payments or the current value of a loan.
Rate This is the interest rate or discount rate of a loan or investment speci ed for
a particular period, such as annually or monthly. It is usually designated by
the symbol I. When entering the interest or discount rate as an argument in
Excel functions, it must be expressed as a percentage or a decimal fraction.
Twelve percent would be entered as 12% or 0.12, but not as 12. If 12% is stated
as the annual rate, the monthly rate would be 12%/12 = 1% unless monthly
compounding is speci ed.
Type This is the type of interval for which investments are made, i.e., whether at
the beginning or end of the period. Set the type as 0 (or omit the parameter)
for payments at the end of the period or set the type as 1 for payments at the
beginning of the period.
Dates This is the entry of a speci c date such as 4/15/2017 for April 15, 2017. Press
F1 for Help within Excel, and then search for the term “date format” for a full
discussion of Excel date formatting.
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148 What Every Engineer Should Know About Excel
1. Amount to which $1 will accumulate at interest rate I per period for n periods:
fv = (1 + I)n (7.1)
2. Payment per period at interest rate I per period for n periods to repay a loan hav-
ing a present value of $1:
3. Present value of $1 contributed per period for n periods at interest rate I per period:
pv = [1 − (1 + I)− n ]/ I (7.3)
4. Amount to which $1 per period will accumulate when invested for n periods at
interest rate I per period:
All of these equations may be evaluated easily with a calculator for single-use computa-
tions, but the appropriate Excel function will be preferable for use in larger programs. In
most cases, the Excel functions allow for more variables and exibility than the simple
formulas.
Table 7.1 gives a summary of the functions we will discuss, the syntax and parameters
for evaluation of each function, and a description of the computation performed by the
function. Parameters enclosed in square brackets ([]) are considered optional. At least one
speci c example will be given for each function, and, where needed, a copy of the appro-
priate worksheet displays will be provided.
TABLE 7.1
Financial Functions and Operational Syntax
Name of
Function Syntax Calculation Performed by Function
Financial Functions
Present value PV(rate, nper, pmt, Determines the present value of a set of uniform payments paid
[fv], [type]) out over the number of periods, with a cash value of fv at the
end of the last payment.
Future value FV(rate, nper, pmt, Determines the future value of a set of uniform payments paid out
[pv], [type]) of the investment medium (payments into the investment are
negative values). The payments start with a lump-sum payment
of pv.
Number of NPER(rate, pmt, pv, Calculates the number of uniform payments needed to achieve
periods [fv], [type]) the other values in the syntax statement.
Rate RATE(nper, pmt, pv, Requires an iterative calculation with an initial guess for the nal
[fv], [type], [guess]) rate. If the guess is omitted, a value of 0.1 (10%) is assumed. The
function determines the interest rate necessary to yield the other
values speci ed in the syntax statement.
Payment PMT(rate, nper, pv, Determines the constant periodic payment required to achieve the
[fv], [type]) other values in the syntax statement.
Net present value NPV(rate, value1, Determines the sum of present values for up to 254 values at
[value2], [… to 254 equally spaced time increments. The interest rate is assumed
values]) constant for each period. Payments received are entered as
positive values, whereas payments made are entered as negative
values. The values are entered at the end of each period. An
initial investment at the start of the rst period is added to the
present value calculated by this function. This function may be
thought of as the inverse of the IRR function, i.e., NPV(IRR(…),
…) = 0.
Internal rate of IRR(values, [guess]) Requires an iterative calculation and an initial guess for the rate. If
return no guess is entered, a value of 0.1 (10%) is assumed. If #NUM!
Error values appear, or an unacceptable result is obtained, repeat
using a different guess. This function determines the rate of
return per period necessary to return the set of cell values listed
in the syntax. Payments received are entered as positive values,
whereas payments to the investment are represented as negative
values. The payments need not be uniform, but the period must
be constant in time length. For the calculation, at least one
positive and one negative value are required. This function may
be thought of as the inverse of the NPV function, i.e.,
IRR(NPV(…), …) = 0.
Net present value XNPV(rate, values, Determines the present values for a series of future cash ows that
of a series of dates) may be nonperiodic. Thus, it is necessary to specify the date when
payments that each cash payment is received. The rst date must correspond to
may be the rst cash payment. All other data must have dates later than
nonuniform this entry. The number of values must equal the number of dates;
otherwise, a #NUM! Error will be returned.
Modi ed internal MIRR(values, The values argument represent a series of periodic payments
rate of return nance_rate, (negative values) or income (positive values). The nance_rate is
reinvestment_rate) the “cost” of payments into the fund, whereas reinvestment_rate
represents the rate at which payments out of the fund can be
reinvested. The values must contain at least one positive and one
negative value. The values may be nonuniform, but the period
must be uniform.
(Continued)
150 What Every Engineer Should Know About Excel
Internal rate of XIRR(values, dates, Similar to IRR except that the period may be nonuniform. The IRR
return for [guess]) function should be used for periodic payments. At least one
nonperiodic positive cash ow (payment out) and one negative cash ow
payments (payment in) are necessary for the iterative calculation. If no
guess is made for the interest rate, a value of 0.1 will be assumed.
Each date entry must correspond to its respective value entry.
The earliest date must be the rst entry, but later dates can be in
any order. The XIRR function is related to the XNPV function.
The rate calculated by XIRR corresponds to an interest rate that
will cause XNPV = 0.
Equation 7.1 may be used to calculate the future value for the $5000 as
When this value is added to that of Equation 7.5 of Example 7.1, we obtain $6543.23 +
$10288.18 = $16831.41, a value in agreement with the calculation using the FV function.
FIGURE 7.1
Rate of return for discount bonds
which represents the purchase price of the bond. The last payment is therefore
$250,000 + $3750 = $253,750. The IRR function is entered in cell B22 as
This is the semiannual rate; thus, the annual rate would be 3.3078923 × 2 = 6.6157846%.
Note that no guess was entered for the rate, so the function assumed a value of 10%. If
the calculation were made with a guess of 2%, the same answer would result.
The answer may be checked by calculating the NPV function using a rate of 3.3078923%
and using the same payments in the IRR calculation. This computation is also listed on
the worksheet at cell B24, and it gives the result
which, of course, is the purchase price of the bond at the start of the rst period.
The calculation is performed by calling up the MIRR function in cell B26 of Figure 7.1.
For the semiannual period, the nancing rate is entered as 0.015 (3%/2), whereas the
reinvestment rate is entered as 0.025 (5%/2). We have the result
pv = 68, 000
fv = 100, 000
N=5
Using the logarithms in Equation 7.1 results in an equation for the interest rate as
I = exp[ln(fv/pv)/n] – 1