Excel® 2007 Bible

Chapter 16. Creating Formulas for Financial Applications

<feature><title>In This Chapter</title>

• 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

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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.

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 ...