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Applications of Financial Functions

Financial functions in Excel are used to calculate financial metrics like interest rates, loan payments, depreciation, and investment returns. Common financial functions include PMT to calculate loan payments, NPER to calculate the number of periods for an annuity, FV to calculate future values, DB for depreciation, and NPV for net present value of cash flows. These functions make it easy to analyze investments, loans, and other financial scenarios.

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80 views

Applications of Financial Functions

Financial functions in Excel are used to calculate financial metrics like interest rates, loan payments, depreciation, and investment returns. Common financial functions include PMT to calculate loan payments, NPER to calculate the number of periods for an annuity, FV to calculate future values, DB for depreciation, and NPV for net present value of cash flows. These functions make it easy to analyze investments, loans, and other financial scenarios.

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goyalprateek92
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Financial Functions

Excel comes with a lot of pre-defined functions. These are grouped into
various categories. One of the categories is Financial functions. These
would be used to do various things that would be or use to people in the
finance world. For example there are functions to work out rates of interest,
the amount of a payment for a loan in order to pay the loan off in a set
amount of time, depreciation of value of assets, future values of
investments and many others. These types of functions would be used by
people in financial services, such as bankers or accountants or
stockbrokers or investment managers and so on.

Applications of Financial Functions


How much you would need to spend on monthly payments such as
mortgage or car payments.
How much you would need to save in order to accumulate a specific
amount by a certain point in time.
How much of a down payment you would need to make, for monthly
payments to equal a particular amount.
How much you would gain over time on a specific amount of savings.
It can be used to calculate the payments for a loan or the future value of an
investment.

PMT Function:
= PMT ( rate , nper , pv , fv , type )
Where,
rate: annual interest rate for the loan.
nper: total number of payments to be made on the investment/loan.

pv: present value or the amount borrowed or & omitted in case of


calculating future value of an investment.
fv: value of the investment at the end of the investment period & omitted
in case of loan payments.
type: indicates when payments are due.

Example: Vivek has decided to take out a loan of Rs1000000 from his
friendly banker. Lets calculate, how much per month is this going to cost
him for 5 years?(interest rate 24%)

NPER Function:
Returns the number of periods for an investment based on periodic,
constant payments and a constant interest rate.
syntax:
=NPER(rate, pmt, pv, fv, type)
Pmt: is the payment made each period; it cannot change over the life of
the annuity. Typically, pmt contains principal and interest but no other fees
or taxes.

Example: For a personal loan of 2,50,000. Sai has agreed to pay 10,000
a month and 5 percent annual interest. How long would it take to pay off
that loan?

Here,
amount of the payments is known.
number of payments is the result.

Solution:

FV Function:
Returns the future value of an investment based on periodic, constant
payments and a constant interest rate.

Syntax:
=FV(rate,nper,pmt,pv,type)
The equal sign tells Excel that this is a formula.
Within the parentheses are the arguments.

Example: Imagine that you're saving for a vacation. You would like to
know how much you would have in 12 months, if your account contained
rs5000 to start with and you were to deposit rs2000 a month, at an annual
interest rate of 6 percent.
Given,

interest rate of 6 percent annually is divided by 12 to give a monthly rate.


number of payments is 12 because you want the result after 12 months.
payment amount is your monthly deposit. entered as -2000.
present value is the amount already in the account, entered as -5000.

DB Function:
Returns the depreciation of an asset for a specified period using the fixeddeclining balance method.
Syntax:
=DB(cost,salvage,life,period,month)
Where,
Cost: is the initial cost of the asset.
Salvage: is the value at the end of the depreciation.
Life: is the number of periods over which the asset is being depreciated.
Period: is the period for which you want to calculate the depreciation.
Period must use the same units as life.
Month: is the number of months in the first year.

Example:

NPV Function:
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).
Syntax:
=NPV(rate,value1,value2, ...)
Rate is the rate of discount over the length of one period.
Value1, value2, ... are 1 to 29 arguments representing the payments and
income.

Value1, value2, ... must be equally spaced in time and occur at the end of
each period. NPV uses the order of value1, value2, ... to interpret the order
of cash flows.

Example: What is the net present value of periodic payments of 1000,


2000 and 30000 units with a discount rate of 8.75%. At time zero the costs
were paid as -4000 units.

=NPV(8.75%,1000,2000,30000)=4,943.21units. The net present


value is the returned value minus the initial costs of 4000 units, therefore
units.

NPV=943.21

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