CALCULATE NPV USING EXCEL Identify major components of the Excel window Excel is a computerized spreadsheet, which is an important business tool that helps you report and analyze information. Excel stores spreadsheets in documents called workbooks. Each workbook is made up of individual worksheets, or sheets. Because all sorts of calculations can be made in the Excel spreadsheet, it is much more flexible than a paper spreadsheet. The Excel window has some basic components, such as an Active cell, Column headings, a Formula bar, a Name box, the mouse pointer, Row headings, Sheet tabs, a Task Pane, Tab scrolling buttons and Toolbars. 2 1
A sample Excel worksheet 3 Excel worksheets and workbooks When you set up calculations in a worksheet, if an entry is changed in a cell, the spreadsheet will automatically update any calculated values that were based on that entry. When you open Excel, by default it will open a blank workbook with three blank worksheets. When you save a workbook, you have a Save As option that can save the spreadsheet to earlier versions of Excel or to Quattro Pro, Lotus 123 formats, dbase formats, and even to a comma or tab-delimited text file. 4 2
Identify Excel components 5 Descriptions of Excel components 6 3
Navigate within worksheets To navigate within a workbook, you use the arrow keys, PageUp, PageDown, or the Ctrl key in combination with the arrow keys to make larger movements. The most direct means of navigation is with your mouse. Scroll bars are provided and work as they do in all Windows applications. 7 Navigate between worksheets To move to other Worksheets, you can: Click their tab with the mouse Use the Ctrl key with the Page Up and Page Down keys to move sequentially up or down through the worksheets If you are familiar with Microsoft Access, you will find the tab scrolling buttons for moving between worksheets to be similar to record browsing on an Access form or datasheet. 8 4
Navigation keystrokes 9 The Active Cell 10 5
Developing a Worksheet Determine the worksheet s purpose. Enter the data and formulas. Test the worksheet and make any necessary edits / corrections. Document the worksheet and improve appearance. Save and print the complete worksheet. 11 Entering Data into a Worksheet To enter data, first make the cell in which you want to enter the data active by clicking it. Enter the data (text, formulas, dates, etc.) into the active cell. Use the Alt+Enter key combination to enter text on multiple lines within the same cell. Use TAB key, arrow keys, or ENTER key to navigate among the cells. 12 6
Entering Data into a Worksheet 13 Entering Formulas A formula is a mathematical expression that calculates a value. In Excel, formulas always begin with an equal sign (=). A formula can consist of one or more arithmetic operators. The order of precedence is a set of predefined rules that Excel follows to calculate a formula. 14 7
Arithmetic Operators 15 Order of Precedence Rules 16 8
Resize worksheet rows and columns There are a number of methods for altering row height and column width using the mouse or menus: Click the dividing line on the column or row, and drag the dividing line to change the width of the column or height of the row Double-click the border of a column heading, and the column will increase in width to match the length of the longest entry in the column Widths are expressed either in terms of the number of characters or the number of screen pixels. 17 Resize a column 18 9
Identify cell ranges A group of worksheet cells is known as a cell range, or range. Working with ranges in a worksheet makes working with the data easier. Ranges can be adjacent or nonadjacent. An adjacent range is a single, rectangular block of cells Select an adjacent range by clicking on a cell and dragging to an opposite corner of a rectangle of cells A nonadjacent range is comprised of two or more adjacent ranges that are not contiguous to each other To select a nonadjacent range, begin by selecting an adjacent range, then press and hold down the Ctrl key as you select other adjacent ranges 19 Select and move worksheet cells To select a large area of cells, select the first cell in the range, press and hold the Shift key, and then click the last cell in the range. Once you have selected a range of cells, you may move the cells within the worksheet by clicking and dragging the selection from its current location to its new one. By pressing and holding the Ctrl key as you drag, Excel will leave the original selection in its place and paste a copy of the selection in the new location. To move between workbooks, use the Alt key while dragging the selection. 20 10
Adjacent and nonadjacent ranges 21 Range selection techniques 22 11
Moving selected cell ranges 23 Insert worksheet rows and columns You can insert one or many additional rows or columns within a worksheet with just a few steps using the mouse or menu options. You can insert individual cells within a row or column and then choose how to displace the existing cells. You can click the Insert menu and then select row or column, or right click on a row or column heading or a selection of cells and then choose Insert from the shortcut menu. 24 12
Delete worksheet rows and columns To delete and clear cells, rows, or columns, you can use the Edit menu, or right click on a heading or a selection of cells and choose Delete from the shortcut menu. Clearing, as opposed to deleting, does not alter the structure of the worksheet or shift uncleared data cells. What can be confusing about this process is that you can use the Delete key to clear cells, but it does not remove them from the worksheet as you might expect. 25 The Insert dialog box 26 13
Use the Undo and Redo features Editing is an intrinsic task in any document, and especially useful are the Undo and Redo actions. The Undo feature allows you to sequentially back up to a certain action, such as a delete, a move, an entry, etc. and allows you to reverse those actions. Redo allows you to reapply actions one step at a time that you have previously undone. 27 Insert, move, and rename worksheets Worksheets are much like pages within a book; you peruse through them like you flip the pages of a book. There are several ways to move, copy and work with worksheets. Right click on the sheet tab and choose Move or Copy. Select a new position in the workbook for the worksheet or click the Create a copy checkbox and Excel will paste a copy of that worksheet in the workbook. The same shortcut menu for the sheet tab also gives you the option to insert, delete or rename a worksheet. 28 14
Use Excel s functions You can easily calculate the sum of a large number of cells by using a function. A function is a predefined, or built-in, formula for a commonly used calculation. Each Excel function has a name and syntax. The syntax specifies the order in which you must enter the different parts of the function and the location in which you must insert commas, parentheses, and other punctuation Arguments are numbers, text, or cell references used by the function to calculate a value Some arguments are optional 29 Work with the Insert Function button Excel supplies more than 350 functions organized into 10 categories: Database, Date and Time, Engineering, Financial, Information, Logical, Lookup, Math, Text and Data, and Statistical functions You can use the Insert Function button on the Formula bar to select from a list of functions. A series of dialog boxes will assist you in filling in the arguments of the function and this process also enforces the use of proper syntax. 30 15
Math and Statistical functions 31 Define functions, and functions within functions The SUM function is a very commonly used math function in Excel. A basic formula example to add up a small number of cells is =A1+A2+A3+A4, but that method would be cumbersome if there were 100 cells to add up. Use Excel's SUM function to total the values in a range of cells like this: SUM(A1:A100). You can also use functions within functions. Consider the expression =ROUND(AVERAGE(A1:A100),1). This expression would first compute the average of all the values from cell A1 through A100 and then round that result to 1 digit to the right of the decimal point 32 16
Copy and paste formulas and functions Copying and pasting a cell or range of cells is a simple, but highly effective means for quickly filling out a large worksheet. To copy and paste a cell or range: Select the cell or range to be copied and then click the Copy button on the standard toolbar Select the cell or range into which you want to copy the selection and then click the Paste button on the standard toolbar Once you are finished pasting, press the Esc key to deselect the selection 33 Copy and paste effects on cell references Copied formulas or functions that have cell references are adjusted for the target cell or range of cells. For example, if cell G5 contains the formula =F5*B5/B7, and you copy and paste this formula to cell G6, the formula in cell G6 will be =F6*B6/B8. This may or may not be correct for your worksheet, depending upon what you are trying to do. You can control this automatic adjusting of cell references through the use of relative and absolute references. 34 17
Problems using copy and paste with formulas When Excel does not have enough room to display an entire value in a cell, it uses a string of these # symbols to represent that value. For example, the formula in cell J5 is =F5-(H5+I5) and this was pasted into cell J6 by updating the cell references there to =F6-(H6+I6). Cell G5 has the formula =F5*B5/B7 and cell G6 contains =F6*B6/B8. This is where things went wrong. Sometimes this automatic update is very useful and other times it does not give you the desired result for your worksheet. In this case, cells B5 and B7 should be referenced in the formula in column G in all 240 payment period rows, but in column J, you want the cell references to be automatically updated. You can control this result using relative and absolute references. 35 Use relative references A relative reference is a cell reference that shifts when you copy it to a new location on a worksheet. A relative reference changes in relation to the change of location. If you copy a formula to a cell three rows down and five columns to the right, a relative reference to cell B5 in the source cell would become G8 in the destination cell. 36 18
Use absolute references An absolute reference is a cell reference that does not change when you copy the formula to a new location. To create an absolute reference, you preface the column and row designations with a dollar sign ($). For example, the absolute reference for B5 would be $B$5. This cell reference would stay the same no matter where you copied the formula. 37 Use mixed references A mixed reference combines both relative and absolute cell references. You can effectively lock either the row or the column in a mixed reference. For example, in the case of $B5, the row reference would shift, but the column reference would not In the case of B$5, the column reference would shift, but the row reference would not You can switch between absolute, relative and mixed references in the formula easily in the edit mode or on the formula bar by selecting the cell reference in your formula and then pressing the F4 key repeatedly to toggle through the reference options. 38 19
Open the Insert Function dialog box To get help from Excel to insert a function, first click the cell in which you wish to insert the function. Click the Insert Function button. This action will open the Insert Function dialog box. If you do not see the Insert Function button, you may need to select the appropriate toolbar or add the button to an existing toolbar. 39 Examine the Insert Function dialog box 40 20
Insert Function helpful tips In the Insert Function dialog box you can type in a description of what you would like to do in the Search for a function text box and then click the Go button, and Excel will come up with some suggestions for you. You may also select a category from the drop-down box, or choose All, which will list every function in Excel alphabetically. Once you make your selection and click the OK button, another dialog box shows you all the arguments for the function. The arguments shown in boldfaced type are required While the cursor is in an argument's text box, you can either enter a value or click a cell and that cell will appear in the text box, saving you the trouble of typing it 41 The Average Function The average function is necessary to calculate the average of a range of cells. Like any other formula, the average function may be copied across cells. 42 21
Use the financial functions The FV function calculates the future value of an investment based on periodic, constant payments and a constant interest rate per period. The IPMT function provides the interest payment portion of the overall periodic loan payment. The PMT function calculates the entire periodic payment of the loan. The PPMT function calculates just the principal payment portion of the overall periodic payment. The PV function calculates the present value of an investment. 43 Financial Function descriptions 44 22
The Net Present Value (NPV) The NPV can be defined as the sum of present value (PVs) of future cashflows after netting out the initial cashflow investment made. It is commonly used for capital budgeting and widely throughout many mathematics common in economics and the finance industry. NPV can be formulated as: NPV = Total PV of future cashflows Intial cashflow (CF 0 ) Decision Rule: Accept if NPV >0, Reject if NPV < 0 45 The Net Present Value (2) NPV n CF = t + t ( k) =0 1 t. Cost often is CF 0 and is negative. NPV n = t = 1 CF t t ( 1 + k ) CF 0. 46 23
NPV - Example As the Chief Financial Officer of Spamway, Corp., you have been presented with the following two potential projects. Assume a 9% discount rate. Project Γ Project Ψ Time 0-1,500-3,000 Time 1 450 755 Time 2 460 855 Time 3 470 955 Time 4 480 1,054 Time 5 490 1,150 47 NPV - Example 1 0 1 2 3 4 5 9% -$1,500 $450 $460 $470 $480 $490 $412.84 $387.17 $362.93 $340.04 $318.47 $ 321.45 = Net Present Value 48 24
NPV - Example 2 0 1 2 3 4 5 9% -$3,000 $755 $855 $955 $1,054 $1,150 $692.66 $719.64 $737.44 $746.68 $747.42 $ 643.83 = Net Present Value 49 NPV - Excel Excel has some unnecessary challenges doing NPV. The NPV function assumes that all cash flows begin in year 1 (not in year 0), so the easiest way of getting it to do NPV correctly is: =NPV(Rate, Range of CF 1 : CF n ) + CF 0 For example: =NPV(9%,A3:A7)+A2 50 25
NPV - Example Excel Formula: = NPV(18%, B3:B7)+B2 = $321.45 Excel Formula: = NPV(18%, C3:C7)+C2 = $643.83 51 Exercise 2.4 You work for the 3T company which expects to earn at least 18 percent on its investments. You have to choose between two similar projects. Your analysts predict that inflation rate will be a stable 3 percent over the next 7 years. Below is the cash flow information for each project. Which of the two projects would you fund if the decision is based only on financial information? Why? 52 26
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Exercise 2.5 The Custom Bike Company has set up a weighted scoring matrix for evaluation of potential projects. Below are three projects under consideration. 1. Using the scoring matrix below, which project would you rate highest? Lowest? 2. If the weight for " Strong Sponsor" is changed from 2.0 to 5.0, will the project selection change? What are the three highest weighted project scores with this new weight? 3. Why is it important that the weights mirror critical strategic factors? 55 Rate Project 5 the highest and project 2 the lowest. 56 28
5.0 2. Yes. Three highest are Projects 3, 5, and 1. Given the new strong sponsor weight, Project 3 becomes the first choice. However, note that Project 5 is still the near equivalent of Project 3 by the weighting scheme. 3. It is important that the weights mirror critical strategic factors because failure to do so will cause selection of projects that do not contribute the most to the strategic plan. 57 29