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Tuesday, 16 December 2014

Excel Tip: Add a Christmas background to your spreadsheet

Well, this is my last post before Christmas, as I am taking some time off with the family over the Christmas break, so my next post will be in the New Year.

I thought I'd sign off with a simple, but seasonal post.

But, in case you don't read on, I would first of all like to wish all of my readers a very Merry Christmas and I look forward to working with many of you in the New Year.

If you want to add a bit of seasonal spirit to your spreadsheets, why not add a Christmas background?

You can easily add something like the Christmas Tree picture on this post as a background to any worksheet.

All you need to do is go to the Page Layout ribbon and click "Background". You can then browse to image you want to use and click OK. That worksheet will then use that picture as it's background, visible in cells that have "No Color" as their background colour. Note that a fill colour of White is therefore different to "No Color". A cell with a white background will hide the picture.

The picture will "tile", i.e. repeat itself indefinitely, and any cell contents will appear on top of it.

When the Christmas period is over and you want to go back to your boring old spreadsheet, just go back to the Page Layout ribbon and click "Delete Background".

Have a great break and see you in 2015!



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Tuesday, 9 December 2014

Excel Tip: Calculating Net Present Value (NPV)

Last week we covered the IRR function, which enabled us to calculate the Internal Rate of Return of a project.

This week I am going to introduce the NPV function which allows us to calculate Net Present Value - a function closely related to IRR.

The Net Present Value of a series of cash flows, gives a value of those cash flows today discounted by a required rate of return.
The required rate of return represents represents the investor's time value of money. This is often the rate of return achievable in alternative investments.

So, for example, if we have the following series of cash flows (the same example as used for the IRR post):

Initial outlay  £20,000
Year 1 positive cash flow  £500
Year 2 positive cash flow  £5,000
Year 3 positive cash flow  £8.200
Year 4 positive cash flow  £9,000
Year 5 positive cash flow  £9,000

and we require a 10% annual rate of return.

The syntax of the NPV function is:

=NPV(rate,value1,[value2],.....)

where rate is the required rate of return and value1, value2, etc. are a series of cash flows at the same regular interval as the rate, so if the rate is an annual rate, then the cash flows should be a year apart.

value1 is required, whereas [value2] onwards are optional. These can be entered as values or refer to a range. Note that these cash flows are assumed to be at the end of each period.

So we could write the function for our example as follows:

=NPV(0.1, -20000,500,5000,8200,9000,9000)

which returns £2,257.25.

More likely though, we will have the values held in a range of cells as we did in the IRR example:

B2  -20000
B3   500
B4   5000
B5   8200
B6   9000
B7   9000

In this case our function would be:

=NPV(0.1,B2:B7)

Obviously, we would normally also refer to a cell to provide the rate as well, rather than enter it directly into the formula.

NPV relates to IRR  because IRR is the rate that produces zero NPV, so:

=NPV(IRR(B2:B7),B2:B7)

will always return zero.




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Tuesday, 2 December 2014

Excel Tip: Calculating the internal rate of return for a project

Last week I introduced the PMT function for calculating payments on a loan.

This is one of the many functions under the Financial heading in Excel. This week I want to introduce you to another. One that allows you to calculate the internal rate of return (IRR) for a series of cash flows.

The IRR is a method often used to compare alternative projects or investments. and is stated as a percentage return, within a specified period.

As with the PMT function, it is worth starting by stating the assumptions used in the calculation. The IRR function requires the cash flows to be at regular intervals and the return percentage it calculates is  for the length of that interval. So, for example, if the cash flows fed to the function are annual cash flows, then the IRR returned will be a percentage per annum.

Also, the cash flows involved must include both positive and negative cash flows. If you think about this is self-evident, as any return percentage would be infinite if there was no outlay and all cash flows were positive!

Typically this will involve an initial outflow (or investment) followed by a series of projected inflows.

For example, a business investment opportunity might be presented as follows:

Initial outlay  £20,000
Year 1 positive cash flow  £500
Year 2 positive cash flow  £5,000
Year 3 positive cash flow  £8.200
Year 4 positive cash flow  £9,000
Year 5 positive cash flow  £9,000

We might want to compare it to another project and a useful piece of informationin doing this would be to calculate the IRR for each project.

So, how do we do it.

The IRR function syntax is as follows:

=IRR(values,[guess])

Most of the time you won't need the optional [guess] argument, but I will come to that in a minute.

values is the range of cells that show the cash flows in chronological order.

So, for our example we could enter the cash flows in cells B2 to B7 as follows:

B2  -20000
B3   500
B4   5000
B5   8200
B6   9000
B7   9000

Our function would then be:

=IRR(B2:B7)

which returns an IRR of 14% (rounded to zero decimal places). This means that over this 5 year period, the project has an internal rate of return of 14% per annum.

The [guess] argument is there because Excel uses an iterative process to calculate IRR and will give up if it has not arrived at it after 20 iterations. To do this it must start with an estimate. If the [guess] argument is omitted, an estimate of 10% (or 0.1) is used. For most projects this will work with no problems, however with cash flows that fluctuate wildly and/or have an unusually high or low return, it may not get there in the first 20 iterations, if it starts at 10%.

If this happens it will return a #NUM! error. You can then add a guess to the function so that it starts closer to the true answer and therefore can get there within the 20 iterations.

Next week we will look at calculating Net Present Value, which is the flipside of IRR.




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Tuesday, 25 November 2014

Excel Tip: The PMT function - calculating loan payments in Excel

Excel has a baffling array of functions under the heading of "Financial", many of which are only likely to be used by financial analysts. However, over the next few weeks, I will tell you about a few that can be very useful to the rest of us.

This week, I want to introduce you to the PMT function, which allows you to calculate payments on a loan.

Before we get into how the PMT function works, it is useful to note what types of loan it will work for (and what types it won't!).

The function works for loans with a constant interest rate and regular payments of the same amount. The only exception to this is that it does allow for a 'balloon payment' at the end of the loan.

If this is the nature of the loan payment you want to calculate, then the PMT function will work for you.

Essentially, you feed the function the loan details, and it returns the regular payment amount.

The syntax of the PMT function is:

=PMT(Interest Rate,No of Periods,Present Value,[Future Value],[Type])

The last two arguments are optional and we'll come to those later in this post.

The three mandatory arguments are explained below:

Interest Rate: This is the interest rate per payment period, so if you have an annual interest rate of 6% with monthly payments, the Interest Rate entered shound be 0.5% (i.e. 6% divided by 12).

No of Periods: This is the number of periods or payments of the loan. A 5 year loan with monthly payments would be 60, for example.

Present Value: This is the value, today, of the loan and for a new loan will be the loan advance amount.

So, say we have a £10,000 loan over 5 years with monthly payments and an annual interest rate of 12%:

Interest Rate = 12%/12 = 1% or .01
No of Periods = 5 x 12 = 60
Present Value = £10,000

So our function becomes:

=PMT(.01,60,10000)

and returns a monthly payment of £222.44. Note that the function actually returns -222.44 as we entered Present Value as  positive figure. If the receipt of £10,000 is positive, then for consistency, the payment returned is negative. We could enter the £10,000 as a negative number (i.e. a negative payment), which would return a positive payment.

In reality, we wouldn't normally enter these figures into the function directly, more likely we would hold them in cells so that we could experiment with changing their values. and the function would be more like =PMT(B1,B2,B3), where Interest Rate, No of Periods and Present Value were held in cells B1, B2 and B3 respectively.

The final two (optional) arguments work as follows:

[Future Value]: This is where you would enter a 'balloon' payment, or any balance that you wish to remain outstanding at the end of the period you are looking at. You might have a final 'balloon' payment of £5,000, and therefore the payment calculated would need to leave exactly £5,000 outstanding when No of Periods comes to an end. Alternatively, you might recalculate payments annually to hit a specific target balance at the end of each year. This should be entered with the same sign as the payments (i.e. the opposite sign to Present Value). This arguments is treated as zero if omitted, i.e. the loan will be completely paid off after all payments are made.

[Type]: This is a 1 or a 0 and indicates when in each period the payments are made. If this is 0, or omitted, the calculation assumes that payments are made at the end of each of the periods in No of Periods. Enter 1 for this argument if payments are made at the start of each period.


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