09. Excel NPVand Goalseek

Discounted Cashflow modelling

• The key to estimating the value of an asset is to convert future cashflows to present value

• Can be used to value bonds, stocks or entire companies in IPOs or Mergers

• Future cashflows are discounted to present values at a certain interest rate

• The Net Present Value of the future cashflows is the fair value of that asset

Input the following projected cash flows and interest rate

Select cell D13

Click Formulas -> Financial -> NPV

For Rate select cell containing Interest Rate

For Value1 choose select the cashflows in table

Click OK

Calculates Net Present Value

Goal Seek

Calculating Yield

• Sometimes we want to find what interest rate we would earn by investing e.g. finding the yield to maturity of a bond

• The cashflows are the coupon payments from the bond

• The present value is the price we could buy the bond for in the market

• What interest rate would we earn from buying the bond, and waiting for the coupon payments?

Calculate the yield if the price of bond is £420and the coupon payments are £100 per year

Click Data -> What-If Analysis -> Goal Seek

Set cell D13 to value 420By changing cell D11

Click OK

Finds that the interest rate would be 0.061which means 6.1%

Click OK

If statements

If statements allow you to evaluate a cell and draw a conclusion

An investor may only be willing to buy an asset which provided an NPV of £450

Change the initial interest rate to 4% (0.04)

You want to make the conclusion obvious in cell D15

Click Formulas -> Logical -> IF

In Logical_test write the condition which must be true or false i.e. D13>450

If True then show YesIf False then show No

Click OK

In the current example the investor will not invest as the NPV is less than £450

Change the interest rate to 2% (0.02)

The conclusion has now changed, to say that the investor should invest

Table formatting

You can format cells to make them look more presentable

Select your table, right-click, then chooseFormat Cells

Choose Border

Select double line border

Choose Top and Bottom borders

Click OK

Interest Rate is currently displayed as a decimal

Right-click on the cell, then select Format Cells

Choose Number -> Percentage

Click OK

Interest Rate now expressed as a percentage

File -> Save As -> 09b-datacompleted.xlsx

Challenge

• Use Goal Seek to find the interest rate which would give an NPV of £480

• Produce an If statement to say Yes when the interest rate is above 4%, and No when it is less than 4%