So really what we need to do here, if we look inside of this function, is we need

to figure
out a way to automate this two here. So the computer always measures the correct
number
that's needed for the row index number. So what we're going to do here is pop into
the
cell by tapping F2. And we're going to effectively replace this two, which is
static with a dynamic
function called the rows function. So let's type in rows r o w s. And then we open
up a bracket.
Now, if we try to move around in the spreadsheet, we're still actually stuck inside
of this cell. So
we can tap the F2 key again once. And now we can move around in the spreadsheet. So
what we want to
do is actually select this area here for our rows function. And then we can close
the bracket and
hit enter. So let's make sure that we understand how this function is working now.
If we pop in here,
we can see that what's happening is that the computer is measuring this array here.
And it's
determining that it has two rows. So it's returning a two into the h lookup. Now
this rows function
could be anywhere. We could have placed it over here, but we decided to put it off
to the side so
it was really clear and easy to see. One thing that we can do while we're in here
is go over to
that rose function, select it and tap F4. So it's completely locked down and it
won't move. And now
we can hit enter. Now here comes the ultimate test and a great opportunity for you
to practice
some new keyboard shortcuts. Let's go up here and insert a row alt IR. As you can
see down below,
right down here, our h lookup is working perfectly, since that rose function is now
putting a three
into the h lookup. Remember how to delete a row? Well, first we select it. So we're
going to go shift
spacebar to select a row and then control minus, which deletes it out. As you can
see, everything's
back to normal down here. So I hope that was helpful. Now you know exactly what
causes a lot of errors
in hlookups. It's usually due to the fact that people don't know how to automate
this third argument.
So when an h lookup function, if you're going to use it, you want to make sure that
you absolutely
have a rose function in that third argument, so that it will adapt if people insert
or delete
rose into spreadsheets. Let's jump forward to the next video and we'll look at its
cousin,
the V lookup. So let's jump in here and get our V lookup function built. It works
in almost
the same way as the h lookup. So it's going to feel really familiar and should go
pretty fast.
So let's start down in this cell right here, and we're going to put in equals V L
and V
lookup comes up right away so we can hit the tab key. And first of all, the lookup
value is going to be
similar to the h lookup lookup value is here. Item number four, let's put in a
comma. Now the table
array, we're going to use this vertical data here, and we're going to use the shift
key to
select all the way down, and then all the way across to get the commission as well.
One little
pro tip here is that we can look at this tool tip right there that comes up. We can
see that the
tool tip is showing us that this particular array is five rows by two columns.
We're most
interested in the fact that it's two columns wide. It's really helpful because if
you're
selecting a really wide array like this, it will measure for you that you have six
columns,
and that can be really helpful when you're dealing with larger data sets. Let's
select what we want
here. And now we're going to put in a comma. For now, we're just going to hard code
the column index
number in as a two, because we want the second column here, which is commission,
and then we'll
put in a comma, and we want to put in a false using the tab key like this, close
the bracket,
and hit enter. Now we've started by building the vlookup here with a too hard
coded, but we know
from the previous example that this is going to cause an issue. The issue here
would be if a user
was to go in between these two columns and insert an extra column between them. So
we're going to
automate that third argument here, but instead of a rose function, we're going to
use a columns
function. So let's pop into the cell here and hit F2. We want to replace the hard
coded to this
time with a columns function. So let's delete it out and type in columns like this,
we're going to
open a bracket. And now remember, in order to get out of the cell so that we can
move in the spreadsheet,
we tap the F2 key once more. Now we can use the up arrow to go over here. And we're
going to select
from here across to here for our columns function. Then we can put in a close
bracket and hit enter.
Now let's not forget to lock things down. Let's pop back into that cell, hit F2.
We're going to go
over here and select the columns function array and hit F4, which locks down those
cells, and then we
can hit enter. So let's make sure we understand how this formula is working here.
We can see that
we're getting a 2%, which is the correct commission. So it's really looking for
item number four,
where is it looking? It's looking vertically down here. Once it gets to item number
four,
then it goes across to the second column and returns this commission here of 2%.
Now we want to test things to make sure that they're working by inserting a column.
Now remember
that Alt-IR was the keyboard shortcut for inserting a row. Well, it's really easy
to remember how to
insert a column. It's just Alt-IC. So let's go to this cell right here and go Alt-
IC,
and we've inserted a new column right here. And we can see that our VLOOKUP is
working perfectly
down below. So let's just go in here and tap F2. And we can see that what is
happening now
is this columns function is measuring this purple array. And it's determining that
there are
three columns in the array. It's feeding that three into our VLOOKUP, which is the
correct column
index number. So things are working really well. Now before we forget, let's clean
up our spreadsheet
and practice some keyboard shortcuts. So we want to go to column C here. We select
the column,
remember, by going control spacebar like this, and then we can use control minus to
delete that
column out. Perfect. So now that we've built up here, the HLOOKUP and the VLOOKUP
and correctly
automated that third argument in both of those functions, we've really gotten
through the hard
part. You're going to find in the next videos that the XLOOKUP is so much easier,
and it's not
prone to errors like the HLOOKUP and the VLOOKUP. Really, it's better in every way.
Let's jump
forward to those videos and take a look at our favorite lookup function, the
XLOOKUP.
So in this video, we're going to take a look at the XLOOKUP function, and it's
really better
than the HLOOKUP and VLOOKUP in every way. First of all, the single XLOOKUP
function replaces both
of those functions, and also it's not prone to errors that can get caused by users
inserting rows
or columns. Overall, it's a better function, and you're going to see it's much more
simple.
Let's jump in and take a look at how it works. So in this area where it says
XLOOKUP1,
we're going to look at how the XLOOKUP function can work in a horizontal fashion.
So let's pop into this cell and type equals XL. Right away, the function name comes
up.
We can hit the tab key. Now the lookup value, which is the first argument, is going
to be the same.
We're just going to select item number four, put in a comma. Well, now it's looking
specifically for
the look up array. So where should it look for item number four? Well, we're going
to select right
here, all the way across, just to include these item numbers. Now we put in a
comma,
and now it's asking for the return array. And we're going to select one row right
here,
where all the commissions can be found. What we can do now is just close the
bracket and hit enter.
So now let's perform a test. Recall that when we were looking horizontally with the
HLOOKUP,
inserting rows caused a serious issue. So let's go up here and insert a row. Alt I
R inserts
the row. And as we can see down below, the XLOOKUP function is working correctly.
If we pop into
that function, we can see just why it's working, because each one of these arrays
is just one row.
So it doesn't matter if we insert a row in between them. It works just fine. Now we
can go up here
and clean up this row or delete it by hitting shift spacebar and then control minus
to take it out.
So now let's build up an XLOOKUP function down here in a vertical fashion. So we're
going to hit
equals XL. The function name comes up, hit the tab key. The lookup value is going
to be here.
Item number four, let's put in a comma. For the lookup array, we're going to select
all the way
down here vertically. And then we're going to put in a comma. And for the return
array,
we're going to select these commissions that are from here all the way down to
here. And then we
can close the bracket and hit enter. Now it's always a good idea to test things.
And recall
that when we were looking vertically with the VLOOKUP, it was inserting columns
which caused an issue.
So let's pop over here into this cell and hit Alt I C for insert column. So there's
a new column
there. And as we can see over here, our XLOOKUP is working just fine. So we can go
back over here
and delete this column out, control spacebar to select it, and then control minus
deletes it.
So just to finish things up, we want to make sure that the cells are correctly
locked down so that
we can copy these XLOOKUP functions. Let's pop into this first function here. We're
going to select
all the way across these two arrays, tap F4 to lock them down. Similarly here on
this XLOOKUP,
tap F2, and then highlight across with the shift key, tap F4 to lock them down and
hit enter.
Now I hope you can appreciate from this video just why we like the XLOOKUP function
so much.
First of all, it's replacing both the HLOOKUP and the VLOOKUP. So it means that we
only have to know
one function from this point forward. The other thing is that there's really no
issues with users
inserting rows and columns with the XLOOKUP function. And we don't have to automate
any third
argument with a complicated rows function or a column function. So we're seeing
here that it's
really better in every way. And in the next video, we're going to show you some
added features of
the XLOOKUP, which we really like as well. We'll see you there. So now that we have
these
lookup functions all built up, we're going to introduce an error into the lookup
functions
by putting in an item number that isn't found on the list. And we're going to
investigate in
those functions how we can program it to return something back to us indicating
that it's not
finding the item number on the list. Let's dive in and take a look. So if you could
please make
the following modification in your spreadsheet as well. Right in here for the first
invoice,
we're going to change the item number from four to 12. Now 12 is not found on the
list up above.
So it should cause an error. So let's just punch in right here 12 and hit enter.
And as we can see,
we're getting error messages across here in all four of these lookup functions.
Now it's not the worst thing in the world to have these error messages pop up. But
we may want
something a little more descriptive. For instance, if it's not finding this item
number 12 on the list,
maybe we want it to return the text not found. So the way that you would do this in
an h lookup
function is to wrap the entire function in an if error function. Let's pop into the
cell and take
a look. We're going to tap F2. We're going to go all the way to the beginning just
after the
equal sign here. And we're going to start typing in if error. And we can see the
function name come
up there, if error, we're going to hit tab. And that's going to also open the
bracket. So what
we're going to do is we're going to say, if there's an error inside this whole h
lookup function here,
then after the h lookup, we put in a comma, and we're, it's now asking for the
value if error,
this is where we're going to put double quotes. And we're going to type in a
message, we're
going to say, not found like this, close the double quotes, close the bracket for
the if error,
and now we can hit enter. Now to be consistent, we can do the same thing for the V
lookup. So let's
pop into the cell with an F2. Let's use the left arrow to go all the way over here,
just after the
equal sign, and we're going to start typing in if error, I F E, and we can see the
function name
come up right there down below. So now we tap the tab key, it opens the bracket for
us. Now we go
all the way to the end here, and we're going to put in a comma. And now the value
if error, again,
is going to be not found, just like this, close the double quotes, close the
bracket, and we can hit enter.
So what we have now is a much better solution. It's telling us that the items not
found, which
is much more descriptive and indeed an improvement. The problem with the H lookup
and the V lookup is
that if we look in there, we now have a really complex function, or functions, we
should say,
if error, H lookup, and rows, it's in fact requiring three functions to get all of
this stuff done.
In the next video, let's look at how we do this with the X lookup, which is much
more simple.
We'll see you there. So what we saw in the last video is that if we want the
computer to return a
descriptive message back to us, telling us it can't find a certain item, then we
need to add an if error
to either an H lookup or a V lookup. What you're going to see here is that this
functionality is
built right into the X lookup. So it's going to make it so much easier. Let's take
a peek.
So let's pop over here into this first cell for the X lookup one. We're going to
tap F two. And as
you can see here, we filled out the first one, two, and three required arguments
for this function.
But we can see here, there's a first optional argument right here. It says if not
found. So let's
put in a comma. And what we're going to do here is in brackets, double quotes, in
fact, we're going
to put in the value not found just like this. And then we can close those double
quotes,
and then we can hit enter. Let's do that same modification now to the vertical X
lookup. We'll
tap F two, we'll go to the end here, put in a comma, double quotes, type in not
found like this,
close the double quotes, and hit enter as well. So we were just able to demonstrate
one of the
great optional arguments that's in the X lookup. But there's more than one fact if
we look in the
function here, we can see that if we were to put a comma at the end right here,
we're going to see
that we have match mode as well. So we could do an exact match, or all these other
different types
of matches below. Let's suppose that we just put in a zero, which it's defaulting
to anyways. And then
we put a comma, we have a last optional argument as well for search mode. So by
default, it's searching
first to last, but we could go last to first, or we could do one of these binary
searches as well.
So let's just escape out of here without making any changes, just so we can see
that there's other
optional arguments that we can benefit from with the X lookup as well. Now looking
at all of the
options that are available for the match mode and the search mode is beyond the
scope of this
particular course. But one thing that we hope you've been able to see here through
our demonstrations
is that the X lookup is so much better and more superior to the H lookup and the V
lookup,
we can get a ton of functionality just with the X lookup, either horizontally or
vertically,
without adding in a lot of extra functions that over complicate things. Let's jump
ahead to the
next video, where we're going to finish up all of the work that's required on this
particular tab.
We'll see you there. So what we want to do here is finish up everything on this
lookups tab.
Want to take that error out that we introduced and also complete all the formulas
all the way
down to the bottom. Let's get started. So first things first over here, we change
this item number
from four to 12. Let's hit four and put enter so we can correct that right away.
And we can see
that now we're getting the correct commissions again. Perfect. Now be a great idea
to zoom out so
we can see everything that we have to complete. So we're going to use control alt
minus a few
times just to zoom out to a nice level so that we can see down to the bottom. Now
over on the
right hand side here, we can calculate the commission. And we really could use any
one of these four
columns to do it. But we'll use the X lookup to column to do this one. So let's go
equals and
we're going to say 2%. And then multiply through by the revenue. And that's going
to get us the
commission. We'll just hit enter to get that done. So now we want to copy things
down. So we can
use the shift key to highlight a cross. Hold down the shift key and also highlight
down. And now we
can hit a control D for a fill down. As we can see, we're getting some error
messages in here,
which is a little peculiar. Since all of these item numbers are present on the
original list up
here, there must be an issue with one of our formulas that we're going to have to
investigate.
In fact, just a little pro tip. Now that we've copied everything from here
downwards,
it's easiest to actually check right at the bottom, where we've had the most
movement from top
all the way to bottom. So we're going to go down here and check across this row to
see if the formulas
are correct or not. So let's pop into the first one here, which is the H lookup.
Everything looks
fine. We can see this is locked. And this is locked as well. Let's hit enter, move
across here,
tap F two, aha. Right here, we can see a problem. This array should have been
locked up here in this
area. But it was obviously not locked when we copied it down. So we're going to hit
enter and go
up and fix that. So let's scoot up to the top here and tap F two. And we can see
right away the
issue is over here with these red cells. They're not locked at all. So let's
highlight them with
the shift key and tap the F four key like this to lock them down. We're going to
hit enter. And
then we're going to select down by going control shift down like this, and then
control D, which
is a fill down. Now things look like they're working, but it's always a good idea
to check
our work. Let's go to the bottom here, top F two, we can see that these are locked
correctly,
but this blue one was moving down. Looks good. Let's pop into the next one here for
the first X lookup.
These are both locked. This one's moving down. That's lovely. Let's go to the last
one here,
top F two. Again, we can see that these are locked in place. This cell has moved
down
really nicely from top to bottom. Everything looks like it's working really well.
The only
thing left for us to do right down here is add in total. Remember, alt equals can
put in an auto
sum really quickly. And then we hit enter and we're all done. Looks perfect. Now it
was probably
very obvious to you that we have a strong preference for the X lookup function for
its functionality
and its simplicity. But it's great if you understand also the H lookup and the V
lookup,
because we can almost promise that you're going to encounter these lookup functions
in other older Excel files. It's also great to know the advantages and
disadvantages of upgrading
to the X lookup function so that you can convince others in your organization to
replace these
older H lookups and V lookups with X lookups. Let's jump ahead to the next video
where we're
going to start talking about all the date functions and the date functions which
you'll need to get
things done when you're doing financial analysis. We'll see you there.
So in this chapter, we're going to be talking about date functions in Excel and how
they get used in
financial analysis. Date functions for some people can be really overwhelming
because there's literally
hundreds of different date functions in Excel. But what we find is that if you use
a small list of
hand picked date functions, you can get most of the things done that you need to
get accomplished
inside of Microsoft Excel. We'll also be discussing periodicity a little bit.
So with periodicity, you need to consider the periods of a financial model. For
example,
the most common financial models are annual models, but sometimes there's a need to
break
out quarterly estimates as well in a financial model or even go down to the
granularity of monthly
models, which is done in financial planning and analysis or FP&A. Each one of these
different
types of financial models introduces its own set of challenges. So we need to
understand the best
date functions and how to use them in order to accomplish what we need. We also
need to understand
the custom formats that are commonly used for dates to get them to display exactly
the way that we
want them. We're also going to look at some date functions which can be really
helpful for
modeling debt. Since debt payments may happen regularly on the first day of the
month or perhaps
on the 15th day of the month, we'll need to investigate the date functions which
are appropriate to get
those dates indexing forward through time. And finally, it's relatively common in
financial
analysis to need to calculate a stub period. For example, if the company has a
December 31st year
but we're taking control of the company on March 31st, then we would need to
calculate
a stub period for the company, which is effectively a portion of a full fiscal
year.
As we mentioned earlier, all of the date functions in Microsoft Excel can be a
little bit overwhelming.
What we aim to do in this chapter is point you towards the best date functions that
are really,
really helpful for getting your financial analysis done in Microsoft Excel. Let's
jump into it and
get started. So as we mentioned in the previous video, one of the things that we
always need to
consider with financial modeling is periodicity. And by that we mean the periods
that are across the
top in the financial model. For example, we can have annual models, quarterly
models, or monthly
models. In fact, we're going to start here right at the top with an example of a
monthly model.
Go through some of the date functions that we might use to construct a monthly
model.
So let's jump into it and get started. Now the first function that we want to show
you in this
cell right here where it says current date is a function called the today function.
We can just
type in equals today like this. And then we actually open the bracket and close the
bracket. So we're
leaving the brackets empty and we can hit enter. And what happens is today's date
comes into the cell.
Now you may be seeing something slightly different in the cell. For example, if
you're watching this
video at a later date, then you will see a later date in the cell. The today
function is an example
of a volatile function. So a volatile function is a function which is constantly
changing.
And this particular function will constantly be trying to update. So if I open it
tomorrow,
it will show November 3, 2023 as the date. It's also possible that this date may
look slightly
different on your computer, depending on how you have the date settings configured.
So keep that
in mind as you're working through this particular chapter that your dates may
appear slightly different
than our dates on this example. So this is an example of a date that will change.
But underneath,
we want to hard code a start date in for the model. For example, in here, if you go
into the cell and
put in 2024 dash 01 dash 01 and hit enter. So the model start date is intended to
be January 1st
of 2024. And we want you to understand how dates work in Excel. So let's go over
into this cell
right here. So e seven, we're going to put in an equal sign, and we're simply going
to link it
to this date. Now let's hit enter. As you can see, it's linked directly to the
cell, yet it's showing
that what is actually in that cell is a number 45,232. So what's happening with
Microsoft Excel
is each day it counts as a new serial number. So we're obviously at a large number
right now,
which makes you wonder what exactly was day one? Well, in fact, day one in terms of
Microsoft Excel
was January 1st, 1900. Now the reason that Excel convert states to serial numbers
is so that you
can perform counting operations with them. For example, let's go back into the
cell. And suppose
we wanted to calculate the number of days between this date here and this date
here,
we could simply go into the cell and say equals this future date, minus this date
here. And when
we hit enter, we can see that there's 60 days between them, which is really
helpful. So it's really
helpful to know that behind the scenes dates are really serial numbers. And the
reason that they
are serial numbers is so that we can perform addition and subtraction on the
various dates,
which is really helpful. Let's pop into this cell for now and just delete this out.
Then in the
next video, we're going to start to populate these cells right across here using
some of the date
functions that are available in Microsoft Excel. We'll see you there. So now that
we have the model
start date configured, we're in a position where we can get the headings working
across the top
of the model. One thing that we'll say here is it's really common to use the last
day of each
period. And the reason for this is when you see a financial statement, like the
balance sheet,
the figures are always posted as of the last day of the period. So right here is
going to be the
first month of our financial model. And we want that first month to be January,
since the model
starting here January 1st, we wanted to show the last day of January. So there's a
perfect
function that we're going to use in here called EO month stands for end of month.
So we're going to
put in equals EO. And then we see it come up. So we hit the tab key like this wants
to know two
things. It's really simple. The start date, which is right here, and then we put in
a comma,
the number of months we want to go forward is actually zero, because we still want
January.
So let's put in a zero there, close the bracket and hit enter. So as you can see,
the EO month or end of month function is perfect here. We're still in January, but
it's gone to the
31st day, which is the last day. Now what we can do in this cell is build in
another one,
equals EO month like this, hit the tab key. We're going to set the start date as
January 31st,
and then put in a comma and see we want to go one month forward, and then we can
hit enter,
just like this. And now we have the last day of February. Now that we have this
built index
forward by one month, it's perfect. So we can copy it forward through the rest of
the forecast
period. So let's go into the cell and do a copy, control C, we use the shift key to
highlight all
the way across here. Now we don't want to paste everything, or we'll mess up these
nice borders.
So we're going to use a pay special alt es or control alt v if you prefer. And now
we go down
to formulas and hit enter, and we've pasted the formulas perfectly through the
forecast period.
Now notice how careful we were that when we copied this formula forward through the
forecast
period, we only pasted the formulas. The reason that we did this was we wanted the
formats to stay
in place. If you look closely, you'll notice that we've put some effort into these
borders. For example,
we have a border here around Q1, and then another border for Q2, Q3, Q4, etc. This
helps the reader
visually see where each of the quarters are, and makes the model look a little bit
more professional.
So I think you might agree that the EO month or end of month function is really
efficient,
and just a perfect function for this purpose here, where we want to index forward
through a number
of months. Now in the next video, we're going to look at how to change the format
of these cells,
just to make the labels look a little bit cleaner and a little bit more
professional. We'll see you
there. So what we're going to talk about in this short video is how to change the
formats of these
cells. We're not going to change anything about the content that's inside the
cells,
we're just going to get them to display a little bit differently. And this is
referred to as
custom number formatting. It's something that you're going to want to learn for
sure,
because it's going to come up in so many places in Microsoft Excel when you're
doing financial analysis.
So let's think carefully about the format for these cells. We definitely want the
month and
the year to show, but it's not absolutely imperative that we have the day showing.
It might be nice to have this first one just show up as January 2024, for example,
or maybe January 24 to make it even cleaner. So here's what we're going to ask you
to do.
Let's go into this first cell and then hold down Ctrl Shift and the right arrow to
select all the
way across. Now if we were using the mouse, we would now right click and go down
here and click on
Format Cells. It brings up this dialog box right here. But in fact, there's a much
quicker way to
get into this dialog box. Let's tap Escape. In fact, the keyboard shortcut that
we're going to use
here is Ctrl 1, which gets us into that dialog box right away. Now that we're into
this dialog
box, we're going to tap the tab key once. And that's going to get us into this area
here where
we can go up and down. We're going to go all the way down to Custom. Once we get
there, we hit the
tab key again, which gets us into this type box. Now we can hit the Backspace key
to delete out
what's in the type box. And what we want to put here is M, M, M for a month. And
then we can put
a dash. And then we can put two whys for a year. And as you can see up here in the
sample pane,
it's showing that the first cell is going to display as January 24, which is really
nice.
Once we have that configured, we could hit Enter and the format's been changed.
So you can see already how this looks much cleaner across the top here and much
more organized.
Now let's look really, really closely at what's happened. As you can see, March 24
is really, really close to the edge of the cell. For example, the 24 is right near
the boundary
there. Whereas down here with these numbers, we have a little gap. Now we're going
to investigate
why those are different. So for a moment here, don't do this on your model, just
watch what we're
going to do. We're going to copy this number here, copy and paste it above. But
we're going to change
this number to a negative number, we're going to put a minus sign in front of it
just like that.
As you can see, these numbers are perfectly aligned. Now the way that we've been
able to perfectly
line up these commas is because the top number has a right bracket on the right.
But the positive
number here has an invisible right bracket. If you want to see how we've done the
invisible
right bracket, let's just hit control one from this cell. You can see right over
here,
there's an underscore and then a right bracket. The underscore tells Excel that the
next character
is going to be invisible. So what we're going to do after deleting this, we're
going to go up here
and add that invisible right bracket just to get things aligned. So let's take a
look at how we do
this. It's really quick. We're going to select across all of these numbers, hit
control one,
which is our new favorite shortcut. And we're going to hit the tab key twice to get
into this
type box right here. And all we're going to do is put an underscore and then a
right bracket,
which is inserting an invisible right bracket at the end of that date format. And
then we hit enter.
As you can see, it moves things over nicely so that they're aligned with these
numbers below.
So obviously it's not imperative that you put that invisible right bracket there,
but it makes
things look really nice because everything's perfectly aligned like this. And if
you ever see
underscore right bracket in number formats, you'll know that people are doing that
to get the positive
and negative numbers to line up to the right hand side really, really nicely. Let's
jump ahead to
the next video now. And we'll talk about quarterly modeling and some of the date
functions that
we might use for quarterly modeling. We'll see you there. Now, one of the things
that we've
just finished doing is taking a legitimate date from this cell and doing some work
with it to get
the headings. What we want to do in this video is make sure that we understand how
dates work.
We want to be able to take a date, break it apart into its component pieces like
year, month and day.
We also want to be able to take those component pieces and assemble them back
together to get
a legitimate date. Let's jump in and take a look. Now, with this previous example
up here for monthly
modeling, we started the model by inputting a legitimate date. But another way that
you could
start up a model would be to input the component pieces like year, month and day.
So let's do just
that right here. Let's input 2024, enter one for January and a one for the day.
Now, we want to
adjust these formats. We don't need a comma separator here for thousands and we'd
also like to get the
month and day to show two digits. So let's hop into this cell first, hit control
one like this.
And we want to hit the tab key and go all the way down to custom and then hit tab
again to get into
the type box. Now we can hit backspace to delete it. What we want to do in here is
type in four
zeros just like this. And that'll show up here as 2024. Let's hit enter to make
that adjustment.
Now, as you can see in this cell here, we've eliminated that comma for a thousand
separator,
which is perfect. Down here, we'd like these to show as zero one. So let's
highlight both of them
and hit control one to pop into the same place down to custom. We hit the tab key
and delete
what's in the type box. And here we'd like to put zero zero. So it shows up here in
the sample pane
as zero one. Let's hit enter. And we've made that change as well. Now it's our
intention to leave
these dates here hard coded just like this. But we're going to take a little
diversion here because
we want to teach you exactly how to take a legitimate date like this one and
extract the
component parts like the year month and day. In fact, it's really easy. Let's pop
into this cell
here. And we're going to put in a year function, open the bracket, and then go up
and connect to
this date. As soon as you hit enter, you can see that year function pulls out the
year.
As you may have guessed, here for the month, all we're going to do is type equals
month
like this, open the bracket and go back up to the same date. It extracts the month.
Similarly, here, we can say equals day, open the bracket, go up to this date, and
we get the day.
So as you can see in here, the year month and day functions make it really easy to
extract those
components individually from a date. Now you may already be wondering, how might we
be able to
reassemble the year month day into a date? Well, it's really easy as well. We're
going to go in here
and use a function called the date function just like this, which is built exactly
for that purpose.
And then we just direct it to the year, comma, then the month, comma, and then the
day. As soon as we
hit enter, we get a legitimate date back just like this. Now we're really glad we
were able to show
you how to use the year month and day function to extract the components from a
date, because you
may encounter situations where you need to do that. But for our purposes here, we
essentially want
these three items to be hard coded so that they can feed into the model start. So
we're going to hard
code them back again now, 2024, enter, and then one enter one enter. So these are
now the inputs
and they're feeding into the date function right here. So now you can see how easy
it is to take
apart the components of a date and just how easy it is also to put them back
together. So you can go
either way if you ever run into those situations with your financial analysis. Now
that we have the
start date here for the model, let's jump ahead to the next video, and we'll start
populating some
of the headings across the top for quarterly modeling. We'll see you there. Now
that we have
the start date set using the component pieces of year month and date, in this short
video what we
want to do is use those to generate some headings that we can use for quarterly
modeling. Let's
dive in and take a look. Now up above here, we had set up our dates for monthly
modeling like this,
and we haven't grouped into quarters. So we can see at the end of the first
quarter, we have the date
here of March 2024. And over here, we have the end of the next quarter, June 2024.
So what we want
is we want to have March 2024 appear right here, then June, then September, then
December, just like
this. And as you can see, we've set up these nice borders above so that we can
group those into
the first year. Now for this example, the EO month function is going to be perfect
for our purposes
here. We're going to go into the first cell and just type in EO, and it comes up,
we can hit the
tab key, we want to grab the start date, which is right down here, like this, and
then we put a comma.
Now the start date is in January, and we want to go forward two months to get to
March. So we're
going to put a two in here and then hit enter, and you can see March 2024 come up
like that.
Now that we have that first date set at the end of March, we want to go forward in
increments of
three months to get a quarter. So we're going to go into the next cell and also do
an EO month,
hit the tab key, and the start date is going to be right here. But then we're going
to index forward
by three months and hit enter. Perfect June 2024. Now that we have that set, let's
copy and paste it
throughout the forecast period. But remember, we can copy everything, but we only
want to paste
special the formulas. So we're going to go into the cell to copy, control C, we can
see the cell
blinking. So we know it's been copied. Now we use the shift key to highlight all
the way across to
the end of the forecast period. And now we can go alt es or control alt v to get a
paste special.
And now we top the down arrow to get the formulas and hit enter. And that's done.
So let's look through our work here. We have March 2024 June, September, December.
So we have
quarter one, two, three, four, and then it repeats again, one, two, three, four
into this year.
And as you can see, just above, we have these really nicely grouped into years. So
we can see
three years of forecast grouped by quarters. And we're showing those groupings with
those borders,
which is a really nice feature. So as you can see in this example, the EO month
function came in
really handy once again, let's jump ahead to the next video. Now we're going to
take a look at
annual modeling, and you're going to see one of the reasons why it's so much more
simple to get the
headings working for annual models. We'll see you there. As you can see here, we're
down in the
annual modeling section of this particular worksheet. And as we mentioned earlier,
annual models are
incredibly simple. And thus for this reason, often preferred for financial
analysis. One of the things
that also makes them simple is the headings. In fact, we're not even going to use
real dates
here. We're just going to use numbers. Let's jump in and take a look at just how
simple it is.
So as you can see here, we have a starting place for the year, and we can just
input
2000 and 24 like this. And now that's going to set us up nicely to start these
headings up here.
In fact, since the first year of the forecast is going to be 2024, let's just link
this cell
over to the start year, just like this. Now as you can see in here, we have that
comma separator
popping up for thousands, which we don't need. And we're going to change. The other
thing that we
want to do is if we look closely at the alignment, we can see here, there's a nice
little space
with a right hand bracket. And we want to put a similar space into here so that
everything's
aligned really nicely. Let's highlight all the way across here, like this and hit
control one,
so we can get into format cells using the tab key in the down arrow, we can get to
custom
and the tab key once more, we can get into here. Now what we want here is four
zeros in a row like
this. And then we put an underscore in, which tells Excel to make the next
character invisible
for that invisible character. Now we're going to put a right bracket just like
this. And then we can hit
enter. Now this is clean things up really nicely for us, no more comma separator.
And as we can see,
we have nice alignment to the right hand side with a little space in there. Now as
we mentioned
earlier, we're not even using dates. Remember, this is just a number. So all we're
going to do to get
the next year is just pop into here and say equals this one plus one, we hit enter,
and we get
2025. Now we're just going to do a copy and highlight all the way across using the
shift key.
And we want to do a paste special. So alt es or control alt v brings us up down
arrow to formulas
and then we hit enter. And that's all done really nice. So as we can see, we have a
nice forecast
period that goes forward in terms of the years, we're just using numbers, these
aren't even dates.
In fact, this is one of things that makes annual models so simple. Many other
things that make
annual models really, really simple. And in fact, this is the reason why when
you're doing
financial analysis, you should always default to an annual model. Unless there's a
very compelling
reason why you would need a quarterly model, or even the granularity of a monthly
model,
you're going to find that the annual models are so much more simple, can allow you
to focus on the
financial analysis that you're doing. Let's jump ahead to the next video. We're
going to look at
some debt payments and introduce another date function, which is really handy for
those payments.
We'll see you there. As you can see here, we're down in the section for debt
payments.
And the unique thing about debt payments is they often occur always on the same day
of the month.
So the functions that we've used up until now, in fact, won't work for us. We're
going to introduce
a new date function to you. So you have another one in your skill set to be able to
use if you
encounter the situation with debt payments, like mortgages or corporate debt. Let's
take a look.
So the first thing that we want to do in here is set up our first payment date.
We're going to set
that up as 2024 dash 0101. So it's going to be January 1st, 2024. Now we want to
think about the
frequency of these debt payments. And if we're thinking about the example like
mortgage payments,
for example, we would be paying those every month. So let's put in a frequency here
of one month.
And later on, we're going to fix the formatting of this particular cell. But for
now, let's just leave
it as is. Now just to get us started, we can put the first payment right into this
particular cell
here for the heading. We just want to link this down to this first payment date
right here and hit
enter. Now let's pop over into this cell here where the second heading is going to
go and just type
in eDate like this. And I know what you're probably thinking. Finally, a place
where I can set up an
online dating profile and meet some other Excel enthusiasts. Fortunately, it's not
that. But it's
almost as exciting. What we're going to do with the eDate function here is we're
going to put in the
start date right here. And then we're going to say comma for the number of months,
instead of hard
coding a one like this, what we want to do is use the cursor to go down and select
the frequency here.
We're going to top the F4 key to lock that cell down. And then we can hit enter.
Now the great thing
about the eDate function is that what it's done is it's indexed one month forward,
but it's kept
the same day of the month, which is perfect for this application. So let's pop in
here, do a copy,
control C, highlight across with the shift key to the end, and Alt T S or control
Alt V for a pay
special down to formulas and hit enter. And that's all done. So as you can see,
this particular date
function has been perfect for this application. It can index forward by a certain
number of months,
and always keep you into that first day. Sometimes corporate debt payments are on
the 15th day of
the month, and you can index them forward to always be on the 15th day. Really
handy. Let's jump
ahead to the next video and clean up some of the custom number formats that we see
here so we can
get those looking really professional. We'll see you there. Now in this quick
video, we're not going
to make any changes to formulas. We just want to tweak the custom number formats a
little bit
and give you some extra skills so that you'll know how to get great formats in your
financial
models. Let's take a look. Now the first thing for us to tackle is down here. It
says frequency one,
not very descriptive. What we want to do is we want to leave the one in there, but
we want to
custom number format it a little bit. So it would display as say one months, that
would be perfect.
Let's pop into that cell, hit control one, and we're going to use the tab key down
to custom,
hit the tab key again, and we're going to use the backspace key here to wipe that
out. What we're
going to put in is a zero, okay, and then we're going to put a space double quotes,
and then we
want to type in months, just like this, and then double quotes again, and we can
see up in the sample
pane that that's going to display as one months, which is perfect. Now we can hit
okay or enter,
and we've changed the format of that cell. So the neat thing about this is if we
hit F two,
we can see that there's just a one in the cell, but we have it displaying so it's a
little bit more
descriptive now. Now let's get up here and take a look at these formats here. We
want to make some
changes there to make them look a little bit more professional. Now the thing about
the way that these
dates are formatted is it kind of looks like a lot of numbers all the way across,
and it's not
really evident that the payments are always happening on the first day. So to make
it a little
bit more obvious, we might want this first one to display as January 1, 2024, and
then this one could
be February 1, 2024. Let's take a look at how we could do that. And the great thing
about custom
number formats, which is what we're really discussing here, is that we've complete
control
over the formatting. Let's highlight all the way across these cells and hit control
one.
We're going to use the tab key to get down to custom tab key again. We're going to
use backspace
to wipe out that format. And we're going to start typing and as we do, let's watch
the sample
pane really closely up here, we're going to put in three M's for month. And we see
that's going to appear
as Jan, which is perfect. Let's put in a space now and put in a D for the day. So
now we have January
1. Now we're going to put a comma space and then we'll put Y Y Y Y for the year.
That looks perfect.
Now before we forget, we want to put in a visible right bracket for spacing. So
we're going to put
an underscore and then we're going to put in the right bracket here and hit enter.
Now as you can see here, we had total control over how these dates were formatted.
And now it's
looking really clean because it's easy when we look across to see that these
payments are always
happening on the first day. It's really important to know these tricks for custom
number formatting.
So you can use this in some of your models that you're building. Now, obviously,
these changes that
we're making are all individually fairly minor, but collectively they all add up
and make a big,
big difference in your work and can be the difference between a good model and a
great model.
Now let's jump ahead to the next video. We're going to look at stub periods. They
often come
up when you're doing financial analysis whenever you're dealing with an acquisition
or sometimes
when you're dealing with valuation work. Let's jump ahead to that next video. We'll
see you there.
Stub periods come up all the time when we're doing financial analysis. Stub periods
essentially
are synonymous with a partial period. For example, if a company's reporting every
12 months,
then if we needed to look at a nine month period, we would refer to that as a
partial
period or a stub period. They're very, very common when it comes to valuation work.
And also when you're looking at acquisitions, let's jump in and take a look at how
they work
and also a particular date function, which is perfect for calculating stub periods.
So let's start off by looking over here at the fiscal years. And as you can see,
we've labeled
them really clearly and they're going to be in year month day format. Now, let's
assume that the
company will report its next fiscal year at the end of 2024. So in here, we're
going to input 2024
and then 1231 and hit enter, just like this. Now, the company will usually do its
next fiscal
year and exactly 12 months into the future. So this next date here would be 2025,
1231.
So to get that date, we could use either EO month or E date. In this case, let's
try the E date
function. So we pop into this cell and say equals E date, hit the tab key. So
asking for the start
date, which is right here, put in a comma, how many months forward, we're going to
go 12 to get a
year. And then we hit enter. And now what we can do is copy that, control C,
highlight all the way
across here, we're going to do pay special alt es or control alt v. And then we go
down to formulas
and hit enter. And that's been completed. Now, let's look at our valuation date
right here.
Let's suppose that we were going to value this company as 2023, 1231. If we were
going to look
at the value at that date, then there would be exactly one year between that
valuation date.
And when the company reports its next fiscal year end, if we recorded the dates
like this,
we would have a full financial year between the valuation date and the next fiscal
year end,
which would mean we would not have a stub period. Because our spacing would be
exactly
one year here, and then two years, three years, four years, etc. And we would have
perfect one
year spacing and no stub period. In fact, it's relatively common to not have
perfect one year
spacing between the valuation and the next fiscal year end. So we often have stub
periods deal with.
Let's look at an example where we're going to put 2024 dash 03 dash 31. And this is
going to be
our valuation date at the end of March 2024. Now, if we were valuing the company as
of this date,
and then the next fiscal year end was as of this date, it would mean that we would
have the benefit
of nine months of that fiscal year in our valuation. And nine months out of 12
months of the year
would be having the benefit of 75% of that first fiscal year. But how can we get
Excel to calculate
this for us? Well, in Excel, there's a function that's designed exactly for this
purpose. It's called
year frack. So it calculates the fraction of the year that we're dealing with,
which is perfect in
this situation. Let's take a look down here in this cell, we're going to put in
equals, we're going to
type in year and we can see it here year frack, to use the tab key to open that up.
It's asking for
the start date, which is right over here, it's the valuation date, put in a comma,
the end date is
going to be this date right here. And then we just hit enter. And as you can see,
it's calculated
that fraction of the year perfectly. Nine months out of 12 is 75% of the year. Now,
we can easily
just select from here, all the way across and do a control R, which is a fill
right. And as we can
see, after the stub period right here, we get perfect 100% all the way across,
indicating that
there's a full year between every one of those fiscal year end dates. Now, it may
be obvious to you
what we're going to do next. Effectively, what we're going to do is take this
cashflow profile here,
multiply it through by these percentages. So we go into this cell and say equals
this,
multiply through by the cashflow. And then we're going to highlight across just
like this and do
a control R, which is a fill right. So what does this really mean for our valuation
date? Well,
if we've set the valuation date right here, the end of March 2024, it means we get
100%
of all of these cash flows here. But this particular cashflow here of 16 million,
we only get the benefit of 12 million of that 16 million. The other 4 million has
already passed
and it's passed behind us. So it doesn't enter into the valuation of the company.
So whenever you're doing financial analysis, keep in mind that stub periods are
relatively
common. They generally come up with valuation work, or when there's an acquisition.
When there's
an acquisition, you can set the acquisition date here, where you may be acquiring
the company.
And then you only get the benefit of the cash flows, which occur after that
acquisition date.
And whenever you see the need pop up for a stub period, you generally want to
always revert to
that year frack function, which comes in really handy for calculating the
percentage of the year
or the partial year. I hope you've really enjoyed this chapter on dates. It's
important to understand
how they work. We want to be able to deconstruct a date into year month day and
reassemble it using
the date function. We also want to be familiar with functions like EO month and E
date in year
frack, for example, so we can use these whenever the situations present themselves.
So let's jump ahead to the next chapter. We're going to take a look at returns and
also
calculating rates of return net present value, really interesting stuff and also
very, very common
when you're doing any kind of financial analysis. Let's jump ahead to that next
chapter and we'll meet
you there. Now, this final chapter of the course is particularly interesting and
important at the same
time. We're going to be looking at some of the output calculations that are really,
really common
when you do financial analysis. It's very common in financial analysis to either
look at a net present
value or an internal rate of return. So we want to understand exactly which
functions we can use to
do that, but also be aware of some of the pitfalls of using some of these functions
and some of the
errors and inconsistencies which can occur so that we can carefully avoid them. The
other thing that
we want to be very mindful of is the cash flow profile that we're trying to
evaluate. In particular,
we want to look at that cash flow profile and determine whether or not it's
occurring at regular
dates or irregular dates. The other thing to keep in mind when we're calculating
the net present value
is that it can be very dependent on the discount rate. In particular, we often
calculate the weighted
average cost of capital as the discount rate. We want to introduce to you a really
nice function
that you can use to easily calculate the weighted average cost of capital or the
WAC. As we mentioned,
there's lots of important information in this chapter and there's also lots of
interesting material
in this chapter. We can't wait to share it with you. Let's jump ahead and get
started in the next video.
As you can see here, we're on the last worksheet or tab of this particular file.
The one called
Returns, and we want to start by discussing the weighted average cost of capital or
WAC,
W-A-C-C. It's frequently used as the discount rate when doing financial analysis.
We want to look
at a really easy way to calculate it using a particular function in Microsoft
Excel. Now,
as we look down here, we can see that this is referred to as the weighted average
cost of capital.
If we wanted to do a simple average of the cost of capital, we would be averaging
the cost of the
debt and the cost of the equity. If we did a simple average across these two
figures,
we would get 9.5%. Now, we're going to be doing a weighted average cost of capital,
so the debt capital is going to have a 15% weight in the average and the equity
capital is going to
have an 85% weight in the average. Knowing that the equity capital is carrying such
a heavy weight,
means that the answer should come out closer to the 11.5 than it is to the 7.5.
So let's take a look at how we could do this. First of all, manually and
mathematically,
we could put an equal sign in here and we could take this cost multiplied through
by
that weight, and then we could add in this cost and multiply through by this
weight. And if we hit
enter, that will in fact give us the correct answer. And as we can see, it is in
fact closer
to the 11.5 than it is to the 7.5, which makes sense since this is carrying a
heavier weight.
Now what we've done in here is correct, but it's not as efficient as it could be.
If we tap F2,
we can see that this formula is already a little bit complex, but imagine how much
more complicated
it would get. If we had more line items, we'd have to manually enter a lot of cells
in.
Let's look at a different solution. So in fact, the sum product function is
absolutely perfect for
an application like this. Let's pop into the cell and put equals su m p, and then
we can see
the function name come up, we hit the tab key, and we're ready to go. So array one
is going to be up
here, we hold down the shift key to select these two weightings. And then what we
do is we put in
a comma, and then it's asking for a ray two, for a ray two, we select this one here
again using the
shift key, and then we can hit enter. And as we can see, we get the same result.
Now if we look inside
here, we're obviously using the sum product function, but the name is a little
misleading.
In fact, every time you see it, you should think of product sum, because in fact,
what it's doing
is it's taking the product first, and then it's calculating the sum. So what do we
mean by product
sum? Well, the function is actually calculating the product of these two numbers,
meaning it's
multiplying them together. And then it's calculating the product of these two
numbers by multiplying
them together. Once it's calculated, those two products, then it's summing together
the results.
So it's actually working in the sense, like product sum, but the name is obviously
some product.
So whenever you're calculating a weighted average cost of capital and financial
work,
definitely try using the sum product function. It's going to simplify things a
little bit for you.
So let's jump ahead into the next video, and we're going to use this result for the
WAC
and some of our analysis to calculate the MPV for the company. We'll see you there.
So one of the first things that we want to make sure that we do when we're
performing
valuation work is we want to set the valuation date. We also want to communicate
that valuation
date really clearly to anyone that's reading the model. We can think of the
valuation date as
like our goal line. We effectively need to discount every cash flow back to that
exact date. That
date is very important. That's why we want to make it really clear for all the
readers of the financial
model. Now in the last video, we calculated the weighted average cost of capital
for the company.
We're going to obviously use this in the valuation. So let's connect this weighted
average cost of
capital here down into the next section. Here where it says WAC. Let's pop in here
with an equal sign
and connect up to this cell. And let's tap F4 and hit enter. So we can pull the
weighted average
cost of capital down there. And then we can do a copy and move across and also put
it over here.
We're going to use it in two places. Now that we've copied the weighted average
cost of capital down,
let's bring everything down into focus. So we can focus on this area of the model
here.
In particular, we want to put a message right into this cell here. Now our
valuation date in this
case is right down here. It's December 31st, 2023. We want to communicate that
really clearly to the
reader right in this cell with a nice little note. So what we want to do in here is
use a concatenate
function. We're going to type in equals c o n c. And we can see concatenate come
up. Let's
hit the tab key and then open up that function name. Now we want to put in double
quotes. And we
want to put in here, we have assumed a valuation date of and then put a space close
the double
quotes, put a comma in and then go and grab the date down below. Now we're going to
put another
comma. We're going to open the bracket and then say for both examples below and
then put a period,
finish the quotes and then close the bracket. Now we can hit enter.
Now what's happened here is Excel has put that date into a generic number format.
So we're
just seeing right here the serial number that's associated with that date. So we
need to get into
that function now. And we're actually going to use a text function to change that
format. So it
displays as we would like it to display. So let's pop into the cell and make a
modification. We're
going to tap F two. We're going to go over here and right in front of this
reference, we're going to
put in text and open the bracket. So we're inserting a text function here. We go
after this reference
for B 21. And we're going to put in a comma and then open double quotes. And now
we're going to define
the format that we want. We want to see mm mm for month. That'll be a full month
name. And then
one D for the day, comma space and then Y Y Y for year. Now what we can do is we
can close the
double quotes and close the bracket for that text function. Now we're going to hit
enter.
So as you can see, this gives us a really nice label to clearly communicate this
important
information about the valuation date. And what makes it even better, it's
completely dynamic.
Anytime we change this date here, this label will also change. We were able to pull
in the number,
but then we used the text function to put it into the exact format that we wanted
to see
with the full month, day, comma, and then the year. And an important takeaway from
this discussion
is that we always want to communicate information really clearly with those reading
the model,
since it will instill a lot of confidence in them. But what we also want to do is
invest a
little bit of time to make all of our labels and notes dynamic. So anytime we
update the model,
all of those notes and labels are going to update automatically. We'll see you in
the next video.
So what we have here is a situation where we have a cash flow profile. And there's
all these
cash flows that we expect to receive in the future. But what we need to do is we
need to figure out
what they are worth today as of our valuation date. And we're going to call that
value the net
present value or the NPV. Let's jump in and start calculating the NPV. Now we've
already
communicated really clearly that our valuation date is December 31, 2023. And that
is coincidentally
the date of our first cash flow. So we could calculate for starters, the NPV could
be equal
to that cash flow. For example, if this was the only cash flow occurring in our
profile,
then this would be the NPV. But there's obviously more to the story than that. So
this is obviously
the amount of capital that we need to invest at the valuation date. But now what we
need to do is we
need to figure out the net present value of all of these future expected cash flows
here. We can do
that with the NPV function. So let's pop in and add an NPV function now to the
equation. So let's
tap the F2 key. And what we're going to do here is now add in NPV. And we're going
to open a bracket.
The first thing that it's looking for now is the rate. Now if we try to move, we're
only moving
in the cell. We need to tap the F2 key once more. And now we can go up and grab
this rate
of 10.9%. Now we put in a comma. Now it's asking where all of the values are value
123, etc. We can
select from this first cash flow here, use the shift key to get all the way down to
the last one,
and then close the bracket and hit enter. So this is showing us our NPV here. And
we can also calculate
the NPV using the X NPV function. Let's give it a try. Let's type in equals X NPV,
X NPV,
just like this. We're going to open the bracket. It's asking for the rate. That's
the weighted
average cost of capital. Put in a comma. Now it's asking for the values. Well here
are all the values
here. Let's put a comma in. And now it's asking for the dates. And all the dates
are over here.
Let's close the bracket now and hit enter. See what we get. What we have here is a
situation
where we have two results that aren't matching. One of them must be incorrect. In
fact, one of the
things that we're going to see, and we'll discuss it in the next video, is that
this calculation
using the NPV function is incorrect. We're going to put this into strike through
font. We're going
to recommend that you do this as well. So pop into the cell and hit control five,
which gives you
a strike through font, just to indicate that this is incorrect. Now in the next
video, we're
going to jump ahead and we're going to talk about why this NPV function is
incorrect in this case
and why the X NPV is correct. We'll see you there. So in this video, we want to
discuss why the NPV
function is incorrect in this case. It's not always incorrect. In fact, there are a
lot of legitimate
cases where it's absolutely fine to use the NPV function. We just want to make sure
that you
understand it so you can use it in the correct places and always make sure that you
get a correct
result. Let's jump in and talk about it. So let's start by looking at the X NPV
function.
And let's tap F2. The X NPV function asked us about three things. It asked us about
the rate or
the discount rate. It asked us about the values and it asked us about the dates. So
it understood
the timing. Well, the NPV function, let's see what it asked us about. It asked us
about the rate
and it asked us about the values, but it didn't ask us anything about the dates or
the timing.
So let's take a look at what the NPV function was doing. We're going to tap F2.
Since it didn't
ask us about the dates, it must have made an assumption about the dates. Well, the
assumption
that it made was that it was going to discount this first cash flow here back
exactly one year.
The second one gets discounted two years, three years, four years, etc. The problem
is that doesn't
exactly match the timing that we've indicated with the dates. So let's look closely
at these dates.
From the valuation date to the first cash flow is not exactly one year. And from
the valuation
date to the second cash flow here is not exactly two years. So the assumption that
the NPV function
made is actually incorrect. So let's make sure we know exactly how the X NPV
function is working
if we tap F2. Well, what it's doing is it's discounting all of these cash flows
back to this first date
right here. So we need to make sure that this first date is in fact our valuation
date,
which it is. So it's working perfectly in this case. So the main takeaway from this
discussion
is that whenever we have irregular dates, like these ones here, we must use the X
NPV function.
The only time the NPV function will give us a correct result is if we have regular
dates,
which we're going to investigate later. For now, let's jump ahead to the next video
and do a
comparison of IRR versus XIRR and see how they compare in this instance. We'll see
you there.
In this quick video, we're going to compare the results from an IRR function to an
XIRR function.
And we're going to see in this case where we have irregular cash flows that the IRR
function
is once again incorrect and the XIRR function is correct. Let's jump in and take a
quick look at
that comparison. Let's jump in here and first start off by calculating the IRR
right in here,
equals IRR, and we're going to open the bracket. It's just looking for the values.
Really simple.
Let's just grab all of these values like this, close the bracket and hit enter.
And now for the XIRR function, we're going to put in equals XIRR like this, hit the
tab key,
and it's asking for two things. The values number one, which are right here,
we'll select all the way to the bottom like this, and then a comma. It's also
asking us about the
dates. Perfect. We're going to go from here all the way down to there and then put
in a close bracket
and hit enter. Now you may have noticed that the XIRR function asked us about the
values
and the dates, which is perfect. But the IRR function only asked us about the
values.
That means that it's making an assumption about the dates. And again, the
assumption that it's making
is that each one of these cash flows is one year apart, which is incorrect. So in
this case,
once again, the IRR function here is incorrect. We're going to put it in strike
through font.
Another way to get to that strike through font here is if we hit control one, and
then we could go
across here to font, and then we would find strike through right there, and we
could hit okay. That
would be one way to do it. But we prefer the shortcut control five, which is just
like this,
and we can toggle that on and off. So we want to leave that in strike through font,
so we can see that that's incorrect. So really, the main takeaway here is you want
to really watch
out when you have irregular timing to your cash flows, in which case you have to
use the XMPV
or XIRR function. Let's jump ahead to the next video. We're going to show you how
to put a couple
of footnotes into this model so that we can be sure that we're understanding and
communicating
the results correctly. We'll see you there. What we want to do here is just take a
minute and put
a couple of proper footnotes down at the bottom of this section so we can
communicate to the reader
exactly why the MPV function and the IRR function are not working in this case.
Let's jump in and
take a quick look. And what we're going to do is go down to these gray cells here.
The first one, we're just going to paste in a couple of footnotes, and we want to
encourage
you just to pause the video for a second. Make sure that you get these notes in
here
so they communicate good information over to the reader of the financial model.
Hopefully you are able to load or type those footnotes in. Let's just walk through
them.
It's saying that the MPV result is incorrect in this case, but the XMPV result is
correct.
The reason being is because the MPV function always assumes even spacing for the
cash flows.
You can see this footnote is coming up as footnote 1, which pertains up here to the
XMPV function.
Now as you can see here, footnote 1, we're going to have a similar note here for
footnote 2 for the
XIRR function, but let's save some time. We're going to pop down here. We wouldn't
mind if you could
please highlight these two cells, do a copy, then go down to these gray cells here
and we're going
to do a paste special, so Alt-T-S or Ctrl-Alt-V, and then please go down to Values
and hit Enter,
and you should get the same footnote here, but it should come up as footnote 2.
Now the difference with these second footnotes here is they should pertain to the
IRR,
so if you could please select these two footnotes and hit Ctrl-H, which is a Find
and Replace.
What we're going to do in this case is we're going to replace NPV and then hit the
Tab key and replace
it with IRR. We're going to go down here and hit the Replace All button right
there,
and it should have made three replacements for you. Perfect.
One thing to note is that we really like this format for footnotes. We don't want
to clutter up
the model, so we just have these super scripts up here with a 1 and 2, and then
down below we have
more space to spell out exactly what we're trying to communicate to the reader.
Perfect.
So great job at looking through at this cashflow profile with irregular timing.
Let's jump ahead to the next video now, because we're going to look at a cashflow
profile that has
regular timing, and we're going to see and compare the results from NPV, XMPV, and
IRR, and also XIRR.
We'll see you there. In this example, we're going to look at a cashflow profile
that has regular
or evenly spaced timing. You're probably expecting that the NPV and the XMPV
function
are going to match up perfectly. They're going to be close, but they're not going
to exactly match
up. One of the things we're going to do is discuss the reason why there's a slight
difference
between them. Let's jump in and look through it. So first things first. What we
want to do,
first of all, is connect these cash flows over so that we're using the identical
cashflow profile
all the way down like this, and then do a control D for a fail down. Next up over
here,
we're going to put in an equals sign, and then connect across to our valuation
date.
So the valuation dates are exactly identical, but now we're going to project
forward with even
timing. So we're going to say equals, and we're going to use an eDate function in
here. You can
see it pop up like that, eDate. It wants this start date right here, put in a
comma, and then
we're going to hard code 12 months ahead, and we can hit enter. And now we can
select down with
the shift key and do a control D to fill down. So what we have in this case are
exactly the same
cash flows, but the timing is different for these dates. In fact, we can see this
is perfectly
even or regular cashflow timing in this case. Now let's save ourselves a lot of
time. Let's go
across here. We're going to use the shift key to highlight all the way down. We're
going to copy
all of these formulas, pop over here and hit paste, and we've saved ourselves a lot
of work.
Now some of these are in strike through font. We're going to highlight all of them
and hit control
five to put all of them so they're not in strike through font anymore. So what
we're seeing here
in the results is a very small difference between the MPV and the XMPV, and also a
very small
difference down here. In fact, those small differences are due to timing, but it's
a little
different than the timing that we discussed earlier. What we have in the case of
the MPV or
IRR function is we have perfect even spacing from one year to the next, but with
the XMPV,
it's taking into account leap years, which are occurring every four years. Same
thing would go
for the IRR function, assuming even timing between every cash flow, but the XIRR is
correctly
incorporating the leap years. So what we're going to do again here is pop down into
these cells
and paste in a couple of footnotes and encourage you again, if you could please
pause the video
and put these footnotes in place. As you can see, this first footnote, footnote
number three,
is explaining the difference between the XMPV and the MPV. So what we're going to
do, it's similar
to what we did before, we're going to ask you to go in here, highlight these two
cells,
let's do a copy and then go down into these cells and we're going to do a paste
special,
which is Alt-T-S or Ctrl-Alt-V, then we're going to go down here to values and
we've pasted this
result into here. Now what you can do while you still have these two cells selected
is hit Ctrl-H,
which is the find and replace. Notice how it's correctly remembered that we want to
replace MPV
with IRR in this case, which we want to do again. So let's click replace all right
here,
and it's made two replacements, which is perfect. So just to summarize the key
findings from this
little investigation here, if you're working with a model that has even or regular
spacing to the
cash flows, you could either use MPV or XMPV. Similarly, you could either use IRR
or XIRR.
The results are going to be very, very close with the only slight difference coming
from the treatment
of leap years. Now you may think from these discussions that you're going to always
use the
XMPV or XIRR just to avoid potential issues. But one of the things you're going to
find
is that the regular MPV and IRR functions are actually pretty common. The reason is
because annual
models are very, very common in finance and with annual models, they usually have
consistent and
regular spacing to the cash flow timing. So those functions work just fine. But
another
way that you can do it is you could use the XMPV and XIRR all the time just to make
sure that there
aren't any issues. So I hope you enjoyed this Excel course as much as we enjoyed
teaching it and
sharing it with you. Also, understand that it's great to organize Excel functions
into groups or
families as we've done in this course for you. And we really started off in the
course with a
group of basic Excel functions, but we expanded that to include the large and small
function,
which a lot of people don't actually know about. We also know now how to use the
round function and
we know that we can use it not only with positive numbers, but also negative
numbers to round
exactly the way that we need. Now some of the aggregation functions that we also
looked at are
particularly useful. You want to think about these in families. Remember, we have
COUNTIF,
AVERGIF and SUMIF as a family. And then we have the plural versions of these, like
SUMIFs, AVERGIFs
and COUNTIFs. And hopefully we understand the differences and the nuances between
those now
in that they don't always work with ORLogic and ANDLogic as well. And they do have
some limitations.
We had a really thorough discussion of lookup functions. And you may have been
surprised by
the amount of time which we spent on the HLOOKUP and VLOOKUP. But remember, you're
definitely going to
encounter those in older legacy files. You may also encounter people that are
opposed to you
changing them out for XLOOKUP functions. So it's good now that you know the
differences between
those older functions and the newer ones. So you can show them the advantage of
switching up
to the XLOOKUP functions. We also hope that you appreciated all the discussions on
date functions.
We looked closely at annual, quarterly and monthly models and included lots of date
functions in there that can help you save some time with the dates that you're
trying to get.
We also looked at some really neat custom formatting that gets used for dates so
you can
have them presenting exactly the way that you want them to appear. We also did a
very thorough
comparison between MPV and XMPV and IRR and XIRR. And you'll know now when it's
appropriate to use
one versus another. And you'll also know that even when you're dealing with regular
cash flow
timing, you're still going to get some small differences between these functions
due to their
treatment of leap years. One other thing which was a common thread throughout the
course was the
attention on custom number formatting. It's critical to be able to format numbers
properly
and dates properly so that you can get all of your work looking really professional
and clean.
As we mentioned at the beginning, we really hope that you enjoyed this course as
much as we did.
And we hope to see you soon in the next one. We'll see you there.