JF MSISS. Excel Tutorial 4

Transcription

1 JF MSISS Excel 2010 Tutorial 4 In this session you will learn how to: Using functions The IF statement Calculating net present values.

2 1. Building a Spreadsheet Model The standard mortgage is the annuity mortgage, i.e. an amortised loan. This means that the mortgage is repaid over the term of the loan in equal monthly payments. Most mortgages are what are called, variable rate mortgages. That is, if the interest rate changes, the monthly repayment is computed to pay off the loan within the same period. The formula used to calculate the repayment is: P = A * (R/100) * (1 + R/100) n {1 - (1 + R/100) n } Where P = monthly repayment R = interest rate per month n = term of loan remaining in months A = amount outstanding Interest paid is tax deductible, but the interest component of each repayment declines after about year 10 of a 20 year loan, in the following scenario. Build a spreadsheet model to prove the assertion that interest falls off after years 2. Setting up the Model Start by setting up the spreadsheet as shown below: The month goes from 1 to 240. JF MSISS -2- Excel Tutorial 4

3 The rate per month is calculated using the formula (1 + Annual Interest Rate) 1/12-1 Enter in the formula that calculates this monthly interest rate, the power symbol in Excel is ^ Excel has a function which can be used to calculate the payment. It is the PMT function. PMT returns the periodic payment for an annuity based on constant payments and a constant interest rate. The syntax is PMT(rate,nper,pv) rate nper pv is the interest rate per period is the total number of payment periods in an annuity is the present value that a series of future payments is worth now Calculate the payment using this function. Remember you can use the function wizard to help you enter the function. The top section of your spreadsheet should now be as follows :- You are now going to calculate the tax relief per month. Relief is only available on 80% of interest up to the value of 8,000, for a couple. Add the following section to your spreadsheet:- Calculate the tax relief per month, i.e. maximum * percentage / 12 You are now ready to start entering the values into the body of the table. OPENING In Year 1, Month 1 the opening balance is the amount of the mortgage i.e. cell B3 In the following month it is the closing balance from the previous period. JF MSISS -3- Excel Tutorial 4

4 INTEREST This is the opening balance multiplied by the monthly interest rate, cell B5. N.B. remember to use absolute addressing PAYMENT This is the payment you calculated previously using the PMT function, i.e. cell B6. Again be careful to use absolute addressing. CLOSING This is the opening balance + interest + payment RELIEF AVAILABLE Relief is only available if interest is less than 8,000, so you need to use an IF function to check this IF Statements Returns one value if logical test evaluates to TRUE and another value if it evaluates to FALSE. Format: =If(logical-test, true-value, false-value) If the condition is true, Excel returns the true-value expression, otherwise it returns the falsevalue expression. E.G. =If(2*2 > 3,10*A4,0) returns 70 when cell A4 contains the numeric value 7. In the mortgage model the IF statement will have the following logic IF ( interest is less than the tax relief per month (E5), then enter the figure for the interest, else enter the figure for tax relief per month (E5)) TAX RELIEF The tax relief is equal to the relief available * marginal relief rate. Again remember to use absolute addressing. NET PAYMENT The net payment is equal to the Payment + Tax Relief The first few rows of your spreadsheet should now appear as follows:- JF MSISS -4- Excel Tutorial 4

5 Calculating the Net Present Value You are now going to calculate the Net Present Value of the mortgage using a 5% discount rate. Add the extra cells to your spreadsheet as shown below:- Calculate the NPV monthly rate as before. Excel has a function NPV which returns the net present value of an investment based on a series of periodic cash flows and a discount rate. The syntax is NPV (rate, value 1) rate value 1 is the rate of discount over the length of one period represents the series of payments Enter the formula to calculate the NPV Your completed spreadsheet should appear as follows : JF MSISS -5- Excel Tutorial 4

6 Note what month the interest tails off in by seeing when Relief Available begins to fall JF MSISS -6- Excel Tutorial 4