Building Analytic Applications using MS-

EXCEL
Recap Quiz

1. Which function is used for measuring variation?

2. How would you graphically present a data trend?

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Recap Quiz Solution

1. STDEV
2. Trendline

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Building Analytic Applications using MS-
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Objectives

In this session, you will learn to:

Analyze optimal investment decisions using financial
functions
Amortize loans using financial functions

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Overview

Most business decisions are investment decisions that can

be evaluated using financial functions such as NPV and
IRR. The PMT function is used to calculate the periodic
payments of a loan. An amortization table is used to
calculate a series of periodic payments to pay off both the
principal amount as well as the accrued interest. What-if-
analysis is performed by using the goal seek method to
automatically recalculate the formulas in a worksheet when
any one of the values in the source data changes.

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NPV for an Investment

NPV calculates the net present value of an investment by

using a discount rate and a series of future payments
(negative values) and income (positive values).
In case of independent projects, if the NPV of a prospective
project is positive, it is accepted and if it is negative, the
project is rejected. In mutually exclusive projects, the project
with the largest (positive) NPV is selected.

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IRR for an Investment

IRR is the interest rate received for an investment consisting

of payments (negative values) and income (positive values)
that occur at regular periods. The internal rate of return is
the discount rate that results in a net present value of zero.
In independent projects, an IRR greater than the cost of
capital is accepted. In mutually exclusive projects, the
project with the higher IRR is selected (as long as the IRR is
greater than the cost of capital).

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Analyzing Optimal Investment Decisions

Problem Statement 1.4 (Practice)

Nancy Jones, the Chief Executive Officer (CEO) of Books
Treasure, Inc., is analyzing two mutually exclusive projects.
The details of the two projects are given here:
Project Project A Project B

Initial Investment $10,000 $50,000

Expected Cash Year1:$3,000 Year1:$16,000

Flows Year 2: $4,200 Year 2: $18,000
Year 3:$6,800 Year 3:$19,000
Discount Rate 10% 10%

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Analyzing Optimal Investment Decisions (Contd.)

Task
Analyze the investments in Project A and Project B and select
the optimal investment amount.

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Just a Minute

1. What is a discounted cash flow method?

2. If IRR> discount rate, _______ the project.
(Accept/Reject)
3. In case of multiple investments, which investment would
you choose based on NPV value?
4. How is NPV related to the IRR function?

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Amortizing Loans

Amortizing loans is calculating a series of constant periodic

payments to pay off both the principal amount of the loan as
well as all the accrued interest payments.
The payment schedule is based on a specified periodic
interest rate and the specified number of payments to pay
off the loan amount.
PMT function calculates the periodic (monthly/annually)
payment of the loan.
The monthly payment is composed of the interest amount
and the principal amount.

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Amortizing Loans (Contd.)

Problem Statement 1.5 (Practice)

Both, Books Treasure, Inc. and Money Saver Corporation
bank,are offering home loan schemes. The details of the
scheme are as follows:
Organization Amount Rate of Interest Number of
Per Year Periods

Books Treasure, $1,50,000 3% 5 years

Inc.

Money Saver $1,50,000 4% 8 years

Corporation Bank

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Amortizing Loans (Contd.)

Task
Select the optimal loan option.

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Building Analytic Applications using MS-
EXCEL Amortization Table
Creating

An amortization table shows the amount of each

payment applied to interest and principal and
shows the remaining balance after each payment
is made.
The balance payment should come to zero at the
end of the amortization table.
The amortization table calculates the following:
The interest amount
The principal amount
The payment amount
The balance amount

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Amortizing Table

Problem Statement 1.6 (Practice)

Chris Donaldson, the Marketing Manager of Books
Treasure, Inc. wants to borrow $2,00,000 from the
company. He has to repay the loan in a period of 7 years in
monthly installments at an annual rate of interest of 5%.
Task
Create an amortization table

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Using Goal Seek Method

Goal Seek is a method for performing What-if-analysis.

It is an automated trial and error method to determine a
specific value in a cell by adjusting the value of the other
cell (the cell must be calculated using a formula).

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Goal Seek Method

Problem Statement 1. 7 (Practice)

Money Saver Corporation Bank offers a recurring deposit
scheme wherein the clients of the bank initially deposit a
fixed amount and then, deposit installments periodically for
a fixed duration called the maturity duration. At the end of
the maturity duration, the bank pays back an amount called
the maturity amount at an interest rate of 5% per annum.
The bank uses FV function to calculate the maturity amount.
Jim Lewis, an employee of Books Treasure, Inc. wants to
invest $4,000 as the initial deposit. He plans to deposit
monthly installments of $600 for one year.

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Goal Seek Method (Contd.)

Task
Calculate the value of monthly deposit that Jim needs to
deposit so that the bank pays him a maturity amount of $8,000
at the end of the year.

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Just a Minute

1. A four-year loan with monthly payments would result in

nper of _____.
2. Identify the function for the problem: If $5,000 is invested
for which the expected investment is $10,000 in 3 years,
what is the rate of return?

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Summary

In this session, you learned that:

NPV and IRR are discounted cash flow methods and are
used to make investment decisions.
PMT function calculates the monthly loan payments.
Other financial functions of Excel are PV, FV, RATE, and
NPER, and TYPE.
Payment type specifies whether the periodic payment of the
loan is made at the beginning (1) or at the end (0) of the
period.

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Summary (Contd.)

An amortization table calculate a series of constant periodic

payments to pay off both the principal (present value) of a
loan as well as all accrued interest, based on the given
periodic interest rate and a given total number of payments.
Goal Seek method of What-If-Analysis is used to set a goal
and determine what facts must exist to achieve that goal.

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