Microsoft Office Tutorials and References
In Depth Information
Chapter 11: Borrowing and
Investing Formulas
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
It's a safe bet that the most common use for 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 Corpora-
tion result in a positive cash flow in the next 18 months? ). This is the first of three chapters that discuss 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's 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.
For example, imagine that your rich uncle decided to give away some money and asked you to choose one of the
following options:
• Receive $8,000 today
• Receive $9,500 in one year
• Receive $12,000 in five years
• 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 lender. When you invest money in a bank savings account, you're a lender; you're lending your money
to the bank, and the bank is borrowing it from you.
Several concepts contribute to the time value of money:
Search JabSto ::

Custom Search