Excel 2010 Bible

329

CHAPTER

Creating Formulas

for Financial

Applications

IN THIS CHAPTER

A brief overview of the Excel

functions that deal with the

time value of money

Formulas that perform various

types of loan calculations

Formulas that perform various

types of investment

calculations

An overview of Excel

depreciation functions

I

t’s a safe bet that the most common use of Excel is to perform calcula-
tions involving money. Every day, people make hundreds of thousands
of financial decisions based on the numbers that are calculated in a
spreadsheet. These decisions range from simple (Can I afford to buy a new
car?) to complex (Will purchasing XYZ Corporation result in a positive cash flow
in the next 18 months?). This chapter discusses basic financial calculations that
you can perform with the assistance of Excel.

The Time Value of Money .................................................................................................

The face value of money may not always be what it seems. A key consider-

ation is the time value of money. This concept involves calculating the value

of money in the past, present, or future. It is based on the premise that

money increases in value over time because of interest earned by the money.

In other words, a dollar invested today will be worth more tomorrow.

For example, imagine that your rich uncle decided to give away some money

and asked you to choose one of the following options:

l (^) Receive $8,000 today.
l Receive $9,500 in one year.
l (^) Receive $12,000 in five years.
l Receive $150 per month for five years.
If your goal is to maximize the amount received, you need to take into
account not only the face value of the money but also the time value of the
money when it arrives in your hands.