Microsoft Office

Creating Formulas for
Financial Applications
It’s a safe bet that the most common use of Excel is to perform calculations
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 consideration 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.
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’s
depreciation functions
For example, imagine that your rich uncle decided to give away some money and
asked you to choose one of the following options:
n Receive $8,000 today
n Receive $9,500 in one year
n Receive $12,000 in five years
n 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.
The time value of money depends on your perspective. In other words, you’re
either a lender or a borrower. When you take out a loan to purchase an automobile,
you’re a borrower, and the institution that provides the funds to you is the
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