Module+18000+XIII+Further+Study

XIII. Module 18000 Further Study rrw

**Further Study ** The following problems are examples of the financial problems that can be solved with a basic understanding of the **Time Value of Money** using the functions in Microsoft Excel.


 * __Capital Budgeting Problem: __** An investment has an installed cost of $100,000. The cash flows over the 4-year life of the investment are projected to be $35,000, $28,000, $25,000 and $20,000. If the discount rate is 10%, what is the NPV?

Using the **NP** **V ** function in Microsoft Excel to solve the above problem:


 * =Initial Investment+NPV(rate,value1,value2,value3,value4) **

Where: Initial Investment = installed cost; rate = Interest; value1 = Cash Flow in 1st year; value2 = Cash Flow in 2nd year; value3 = Cash Flow in 3rd year; value4 = Cash Flow in 4th year.


 * =-100000+NPV(.10,35000,28000,25000,20000) **


 * __-$12,598.18 __**(Note: the above function must be typed in one cell with no spaces.)

Since the above NPV is negative, this would not be a good investment. NPV should be a positive number for this investment to be considered.


 * __Stock Valuation Problem: __** A bank has just issued shares of preferred stock that sold for $80 per share. The shares will earn an annual dividend of $2.00 and the market requires a 6% return on this stock. What will be the price of a share of stock in 10 years?

<span style="font-family: 'Times New Roman','serif'; font-size: 18.6667px;">Using the **F** **<span style="font-family: 'Times New Roman','serif'; font-size: 18.6667px;">V **<span style="font-family: 'Times New Roman','serif'; font-size: 18.6667px;"> function in Microsoft Excel to solve the above problem:


 * <span style="font-family: 'Times New Roman','serif'; font-size: 18.6667px;">=FV(rate,nper,pmt,PV) **

<span style="font-family: 'Times New Roman','serif'; font-size: 18.6667px;">Where: rate = Interest; nper = Number of Periods; pmt = Annual Dividend; PV = Present Value.


 * <span style="font-family: 'Times New Roman','serif'; font-size: 18.6667px;">=FV(.06,10,-2.00,-80) **


 * __<span style="font-family: 'Times New Roman','serif'; font-size: 18.6667px;">$169.63 __**<span style="font-family: 'Times New Roman','serif'; font-size: 18.6667px;">(Note: the above function must be typed in one cell with no spaces.)

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">Reference: <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">Ross, S. A., Westerfield, R. W., Jordan, B. D. (2010). //Fundamentals of Corporate Finance//. New York, NY: McGraw-Hill/Irwin.

<span style="font-family: 'Times New Roman','serif'; font-size: 16px;">References used in the Excel functions: <span style="font-family: 'Times New Roman','serif'; font-size: 16px;">[] __<span style="font-family: 'Times New Roman','serif';">http://office.microsoft.com/en-us/excel-help/financial-functions-HP005200181.aspx?CTT=3 __