Popular Financial Functions

IRR, MIRR & NPV Calculation

Note: The Illustrations below focus on Excel based calculation alone. For conceptual understanding ref

IRR
IRR measures the return generated form a single or multiple stream of Cash inflows and outflows Syntax =IRR(values,[guess]) Illustration Initial investment Year 1 Year 2 Year 3 Year 4 Year 5 IRR -500 350 450 150 -90 250 48.78% Check When discounted at IRR, PV must be same as Initial Investment 0.672 235.24 0.452 203.29 0.304 45.54 0.204 -18.37 0.137 34.29 PV >> 500.00

Pitfalls/Remarks 1. Make sure to include initial investment as well (In negative) 2. The guess part of the syntax is optional 3. Interval between periods must be equal 4. Has an accuracy of 0.00001% Calculate IRR using Excel's built-in Function Answer in Blue cells only!

Initial Investment Year 1 Year 2 Year 3 Year 4 Year 5

-150 -100 -80 0 150 300

IRR

MIRR
MIRR aims to de-link the Reinvestment Rate (RR) from IRR to arrive at a more realistic figure Syntax: =MIRR(values,finance_rate,reinvest_rate) Note: When RR = IRR, MIRR will equal IRR Illustration Initial investment Year 1 Year 2 Year 3 Year 4 Year 5 RR IRR MIRR

-500 350 450 150 -90 250 10.00% 48.78% 24.38%

Initial investment Year 1 Year 2 Year 3 Year 4 Year 5 RR IRR MIRR

-500 350 450 150 -90 250 48.78% 48.78% 48.78%

Pitfalls/Remarks 1. Make sure to include initial investment as well (In negative) 2. Interval between periods must be equal 4. Has an accuracy of 0.00001% Calculate MIRR using Excel's built-in Function Answer in Blue cells only!

Initial Investment Year 1 Year 2 Year 3 Year 4 Year 5 RR IRR MIRR

-150 -100 -80 0 150 300 11.5% 8%

NPV
NPV uses "Present Value" to determine the Time Value of Money Syntax: =NPV(rate,value1,value2,...) Note: NPV = PV-Initial Investment Illustration Initial investment Year 1 Year 2 Year 3 Year 4 Year 5 Cost of Capital PV NPV Check When discounted at Cost of Capital, NPV must be same as calculated using Excel 0.909 318.18 0.826 371.90 0.751 112.70 0.683 -61.47 0.621 155.23 10.00% PV >> 896.54 NPV>> 396.54

500 350 450 150 -90 250 10.00% $896.54 $396.54

Pitfalls/Remarks 1. If the investment is at end of the first period it must not be included in the NPV arguments, but subtracted from the result to arrive at the 'Net' Present Value 2. Interval between periods must be equal Calculate NPV using Excel's built-in Function Answer in Blue cells only! Initial investment Year 1 Year 2 Year 3 Year 4 Year 5 Cost of Capital NPV 500 450 560 500 120 -150 10.00% <<Invested Today

ed calculation alone. For conceptual understanding refer to this article

gle or multiple stream of Cash inflows and outflows

Check When discounted at IRR, PV must be same as Initial Investment = Cash Flow x Discount Factor

=sum(All discounted cash flows)

ell (In negative)

Excel's built-in Function

RR) from IRR to arrive at a more realistic figure reinvest_rate)

ell (In negative)

g Excel's built-in Function

me Value of Money

Check When discounted at Cost of Capital, V must be same as calculated using Excel = Cash Flow x Discount Factor

=sum(All discounted cash flows) =PV-Initial Investement

d it must not be included in the NPV arguments, but t' Present Value

V using Excel's built-in Function

Initial investment Year 1 Year 2 Year 3 Year 4 Year 5 Cost of Capital NPV

500 450 560 500 120 -150 10.00%

<< Invested 1 Year from Now

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Popular Financial Functions

Calculating EMIs & Implied Rates

Calculating EMIs using the PMT function

Equated Monthly Installment (EMI) are equal payments made throughout the mentioned loan perio and pricinipal payments on a compounded basis. Syntax =PMT(rate,nper,pv,[fv],[type]) Illustration of PMT Loan Amount $1,000.00

Check The Present Value Annuity Factor (PVAF) can be used to t EMIs thus calculated PVAF Formula PVAF Calculation EMI (Amt/PVAF)

Period (in Years) 5 Months in a Year 12 Total Months 60 Interest Rate (annual) 7% Interest Rate (monthly) 0.58% EMI $19.80 =PMT(0.58%,60,-1000)

Pitfalls/Remarks 1. Make sure to convert Interest Rates & No. of Periods to a monthly basis 2. Loan Amount must always be negative

Calculate EMI using Excel's built-in Function Answer in Blue cells only! Loan Amount Period (in Years) Interest Rate (annual) Months in a Year Total Months Interest Rate (monthly) $1,000.00 3 8.5%

EMI

Using RATE function to find out Implied/Hidden Interest Rate in an EMI

Syntax: Note: Illustration Loan Amount Period (in Years) Months in a Year Total Months EMI Implied Annual Rate =RATE(nper,pmt,pv,[fv],[type],[guess]) Rate thus calculated will be monthly. Multiply by 12 to get annual rate

$1,000.00 5 12 60 $19.80 7.00% =RATE(60,$19.8,-1000)*12

Pitfalls/Remarks 1. Make sure to convert No. of Periods to a monthly basis 2. Loan Amount must always be negative

Calculate EMI using Excel's built-in Function Answer in Blue cells only! Loan Amount Period (in Years) EMI Months in a Year Total Months Rate (Annual Basis) $1,000.00 3 31.57 12 36

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made throughout the mentioned loan period. The payments incorporate both Interest

Check Value Annuity Factor (PVAF) can be used to test the EMIs thus calculated =(1/i)-(1/((i*(1+i)^n) 50.50 $19.80

to a monthly basis

cel's built-in Function

idden Interest Rate in an EMI

monthly. Multiply by 12 to get annual rate

8,-1000)*12

cel's built-in Function

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Popular Financial Functions

Calculating Investment Returns

Calculating Returns from a Annuity (Regular Investments of Equal Amount)

In the example below an investor wants to determine the Future Value from a Fixed investment of R Syntax =PMT(rate,nper,pv,[fv],[type]) Illustration of FV Annual Investment Period (in Years) Interest Rate (annual) FV 5000 5 15% 33,712 =FV(15%,5,-5000)

Auto Check The Future Value Annuity Factor (FVAF) can be used t Return from an annuity FVAF Formula FVAF Calculation FV (Amt*FVAF)

Pitfalls/Remarks 1. Make sure to convert Interest Rates & No. of Periods to a monthly basis 2. Investment must always be negative 3. Investment must be regular Calculate Returns from a Annuity using Excel's built-in Function Answer in Blue cells only! Monthly Investment Period (in Years) Interest Rate (annual) Months in a Year Total Months Interest Rate (monthly) 1000 3 8.5%

Amount at the end of investment horizon

Investments of Equal Amount)

uture Value from a Fixed investment of Rs.5000 every month for 5 Years

Auto Check alue Annuity Factor (FVAF) can be used to Calculate Return from an annuity =((1+i)^n-1)/i 6.74 33,712

Manual Check Monthly Invested For Investment 4 5,000 3 5,000 2 5,000 1 5,000 0 5,000 FV

15% 8,745 7,604 6,613 5,750 5,000 33,712

=5000*(1+15%)^4 =5000*(1+15%)^3 =5000*(1+15%)^2 =5000*(1+15%)^1 =5000*(1+15%)^0 =SUM(8745:5000)

a monthly basis

sing Excel's built-in Function

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