Agriculture Technology Class

Materials Credited to DMACC

Agriculture Technology Class Spreadsheet Unit – Lesson #10

Part 1

Ever wonder how much savings you'll have accumulated when your kids reach college or you retire? What the monthly payment on that new car or home loan will be? How long it's going to take you to pay off that credit card?

Well, wonder no longer. Excel's financial functions can help you solve everyday problems such as these. Below, you will find a few real-world applications for Excel's powerful collection of financial functions.

This function can be used to calculate the future value of any investment. Supply the function with the four values listed below, and Excel will tell you how much you'll have when you're ready to cash in your investment.

-the weekly, monthly, quarterly or annual interest rate you expect to receive over the life of the investment,

-the length of the investment (in weeks, months, quarters or years),

-the amount that you're socking away each week, month, quarter or year, and

-the present value of your investment (the amount you have already invested).

Let's set up a worksheet to illustrate how this function works. Let's say that you make regular monthly contributions to a retirement account and would like to calculate how much you might have when you reach retirement age. In reading assignment

First, start Excel and position your pointer in cell A1 of a blank worksheet. Type the following labels in column A:

A1: Monthly Rate A2: Period (months) A3: Monthly Payment A4: Present Value A5: Future Value

When you finish, adjust the width of column A and move your cell pointer to cell B1.

In this example, you'll be making monthly contributions to your retirement account, so you'll need to make sure that you use months as your unit of measure all throughout this worksheet.

Ag Technology – Taylor Spreadsheet Lesson #10 Page #1 Materials Credited to DMACC

Let's say that you anticipate earning around 7% a year (compounded monthly) on your investment. However, you need to work with months, not years. To calculate the monthly interest rate, you will need to divide the annual rate by 12 (the number of months in a year). Therefore, we'll need to enter the following formula in cell B1:

=7%/12

Press the ENTER key or down arrow and Excel will calculate your monthly interest rate (0.005833).

You should now be sitting in cell B2. In this cell, you will need to enter the number of months you have until you retire. Let's say that you have 180 months until your employer hands you a gold watch and your walking papers. Type the number 180 in this cell and press the ENTER key or down arrow to move down a row.

Your cell pointer should now be located in cell B3. This is where you need to indicate how much loot you're squirreling away each month. Excel requires you to treat cash you pay out (such as this monthly investment) as a negative number. Let's say you're saving $450 a month for your golden years. Type the number -450 in this cell and press the ENTER key or down arrow once again.

You should now be in cell B4. You will need to enter the amount that you have already saved in this cell. Let's say that you have already managed to accumulate $45,000 in savings. Type the number -45000 in cell B4 (again, cash you have paid out should be entered as a negative number) and press the ENTER key or the down arrow once more.

Finally, it's time to calculate the future value of your investment. Make sure your cell pointer is resting comfortably in cell B5 and click the 'Paste Function' button (older versions of Excel refer to this button as the 'Function Wizard' button). If you'll recall from our last lesson, this button can be found on the standard toolbar. It features an oversized lowercase 'f' next to a small 'x.'

When the dialog box appears, click on the word 'Financial' in the column of function categories on the left side of the dialog box. A list of financial functions will appear on the right side of the dialog box. Click on the 'FV' financial function and then click the 'OK' (or 'Next') button at the bottom of the dialog box.

Another dialog box should now appear. Inside of this dialog box, you will notice several text boxes designed to accept the values we have entered in our worksheet. Inside each of these text boxes, you will need to supply the addresses of the cells containing these values.

Click in the first of these text boxes (the one labeled 'Rate') and type B1 (the address of the cell containing the rate you will be earning).

When you finish, click your mouse or tap the TAB key to move to the next text box (the one labeled 'Nper'). Do NOT press the ENTER key or you will be thrown out of the dialog box prematurely.

Note: If you do get thrown out of the dialog box prematurely, tap the ESC key on your keyboard to free yourself from the half-completed function. Then, start over.

When you get to the 'Nper' field, take a peek at the bottom of the dialog box. Excel will explain to you that this text box should contain the number of payment periods. Type B2 (the address of the cell containing the number of months that you will be investing).

Tap the TAB key to reach the next text box (the one labeled 'Pmt'). Type B3 (the address of the cell containing your monthly investment amount).

TAB into the text box labeled 'Pv' and glance at the bottom of the dialog box. Excel will explain that this text box is meant for you to enter the present value of your investment. Type B4 (the address of the cell containing your current investment balance).

The last text box (the one labeled 'Type') should hold either the number 1 or the number 0. If you deposit your monthly investments at or near the beginning of each month, you should enter a 1 in this text box. If your deposits are closer to the end of each month, then you should enter the number 0 in this text box. Let's enter the number 1 in this box.

When you finish, click the 'OK' button to see the value of your nest egg. If you used the numbers I specified above, Excel should be telling you that you'll have over a quarter of a million dollars to comfort you in your golden years. Excel will treat money you should receive (such as this value) as a positive number.

Now, try plugging in a different set of values in cells B1 through B4. Remember that we're working with monthly investments here, so don't forget to divide your annual interest rate by 12. Also, don't forget to treat your investments (in cells B3 and B4) as negative numbers.

For example, pretend that you and your spouse are planning to go on a cruise two and a half years (30 months) from now. You will be saving $250 a month in an interest- bearing savings account. The interest is compounded monthly, and pays a 3.5% annual rate.

To calculate the amount of savings you will have at the end of this 30 month period, enter the following values in the cells specified:

B1: =3.5%/12 B2: 30 B3: -250 B4: 0

Click the 'File' menu and choose 'Save As' to save your work. Name the file 'finance.xls' and click the 'Save' button.

Part 2

This function will tell you the number of periods (weeks, months, quarters or years) remaining on a loan, provided that you supply the following four values:

-the weekly, monthly, quarterly or annual interest rate that you will be paying on the loan;

-the amount of each weekly, monthly, quarterly or annual payment;

-the present value (current balance) of your loan;

-the future value (ending balance) you'd like the loan to have at the end of the calculated period. If you want the loan to be paid off, this value should be set to 0.

As with the last function, values that you pay out should be entered as negative numbers. You should also make sure that you're working with a consistent unit of time.

Let's set up another worksheet to learn how this function works. Let's say you have a $3,300 balance on a credit card with a 15.5% annual rate. You're paying $150 a month on this card and would like to know how long it will take you to pay the card balance off completely. You're making monthly payments here, so you will want to make sure that you measure all time in months for this example.

To do so, click the 'Sheet2' tab at the bottom of your screen.

Note: if Sheet2 does not yet exist, click the 'Insert' menu at the top of the screen and choose 'Worksheet.'

Once you get to Sheet2, move your cell pointer to cell A1. Fill in column A as follows:

A1: Monthly Rate A2: Monthly Payment A3: Present Value A4: Future Value A5: Number of Payments

Adjust the width of column A and then move your cell pointer to B1.

Type the values below in column B. Notice how you will need to divide the annual interest rate by 12 to calculate the monthly rate. Notice also how your monthly payment is entered as a negative value, because you are paying this amount out. The present value of your loan is not a cash payout, so be sure to enter it as a positive value. You'd like to pay the loan off at the end of the calculated period, so be sure to make the future value of the loan 0.

B1: =15.5%/12 B2: -150 B3: 3300 B4: 0

Finally, it's time to calculate the number of periods remaining on your loan. Make sure your cell pointer is resting comfortably in cell B5 and click the 'Paste Function' button (older versions of Excel refer to this button as the 'Function Wizard' button).

When the dialog box appears, click on the word 'Financial' in the column of function categories on the left side of the dialog box. A list of financial functions will appear on the right side of the dialog box. Click on the 'NPER' financial function and then click the 'OK' (or 'Next') button at the bottom of the dialog box.

Click in the first of these text boxes (the one labeled 'Rate') and type B1 (the address of the cell containing the rate the lender will be earning).

Tap the TAB key to reach the next text box (the one labeled 'Pmt'). Type B2 (the address of the cell containing your monthly payment amount).

TAB into the text box labeled 'Pv' and glance at the bottom of the dialog box. Excel will explain that this text box is meant for you to enter the present value of your loan. Type B3 (the address of the cell containing your current loan balance).

TAB into the text box labeled 'Fv' and type B4 (the future value of your loan).

The last text box (the one labeled 'Type') should hold either the number 1 or the number 0. If you make your monthly payments at or near the beginning of each month, you should enter a 1 in this text box. If your payments are closer to the end of each month, then you should enter the number 0 in this text box. Let's type a 0 in this box this time.

When you finish, click the 'OK' button to determine the number of months remaining on your loan. If you used the numbers I specified above, Excel should be telling you that your credit card will be completely paid off in a little more than 26 months.

Now, try plugging in a different set of values in cells B1 through B4. Remember that we're working with monthly payments here, so don't forget to divide your annual interest rate by 12. Also, don't forget to treat your monthly payment (in cell B2) as a negative number.

Click the 'File' menu and choose 'Save' to save your work again.

Part 3

This function will calculate the weekly, monthly, quarterly or annual payment on a loan, provided that you supply it with the following four values:

-the weekly, monthly, quarterly or annual interest rate;

-the number of weekly, monthly, quarterly or annual payments that need to be made on the loan;

-the present value (current balance) of the loan; and

-the future value (ending balance) you'd like the loan to have at the end of the period you specified. If you want the loan to be paid off, this value should be set to 0.

Let's learn how this function works by creating yet another worksheet. This time, let's say you'd like to borrow $185,000 for 30 years (360 months) to purchase a home. You expect your initial annual interest rate to be 7.5%. You'd like to know what the monthly payment on such a loan might be.

To begin, click the 'Sheet3' tab at the bottom of your screen.

Note: if Sheet3 does not yet exist, click the 'Insert' menu at the top of the screen and choose 'Worksheet.'

Once you get to Sheet3, move your cell pointer to cell A1. Fill in column A as follows:

A1: Monthly Rate A2: Number of Payments A3: Present Value A4: Future Value A5: Monthly Payment

Adjust the width of column A and then move your cell pointer to B1.

Type the values below in column B. Notice how you will need to divide the annual interest rate by 12 to calculate the monthly rate. The present value of your loan is not a cash payout, so be sure to enter it as a positive value. You'd like to pay the loan off completely, so be sure to make the future value of the loan 0.

B1: =7.5%/12 B2: 360 B3: 185000 B4: 0

Finally, it's time to calculate the future value of your investment. Make sure your cell pointer is resting comfortably in cell B5 and click the 'Paste Function' button (older versions of Excel refer to this button as the 'Function Wizard' button).

When the dialog box appears, click on the word 'Financial' in the column of function categories on the left side of the dialog box. A list of financial functions will appear on the right side of the dialog box. Click on the 'PMT' financial function and then click the 'OK' (or 'Next') button at the bottom of the dialog box.

Click in the first of these text boxes (the one labeled 'Rate') and type B1 (the address of the cell containing the rate the lender will be earning).

Tap the TAB key to reach the next text box (the one labeled 'Nper'). Type B2 (the address of the cell containing the number of payments).

TAB into the text box labeled 'Pv' and type B3 (the address of the cell containing your anticipated loan balance).

TAB into the text box labeled 'Fv' and type B4 (the future value of your loan).

The last text box (the one labeled 'Type') should hold either the number 1 or the number 0. If you plan to make your monthly payments at or near the beginning of each month, you should enter a 1 in this text box. If your payments will be closer to the end of each month, then you should enter the number 0 in this text box. Let's type a 0 in this box this time.

When you finish, click the 'OK' button to determine the monthly payment on your loan. If you used the numbers I specified above, Excel should be telling you that your monthly payment will be around $1,293. This number represents a cash payout, so it is negative.

Now, try entering the number 180 in cell B2. Notice how you're paying the loan off in half the time, but your monthly payment only increases by a few hundred dollars. Try decreasing the interest rate to see the effect that can have on your monthly payment. Play with different loan amounts and different numbers of payments. This worksheet can be used for home loans, car loans, student loans, small business loans, personal loans, or any other type of loan.

Remember that we're working with monthly payments here, so don't forget to divide your annual interest rate by 12.

Part 4

If you'd like to know how much of each monthly loan payment will be going for interest and how much is actually being used to pay down the balance of the loan, you'll need to set up an amortization table. This sort of table can easily be constructed in Excel. Here's how:

On Sheet3 of our finance.xls worksheet (where you calculated the monthly payment on a loan), move down to cell A7. Use your TAB key or the right arrow to work your way across row 7, typing the values indicated below:

A7: Month B7: Opening Balance C7: Payment D7: Interest E7: Principal F7: Ending Balance

Now, move to cell A8 and enter the following values or formulas across row 8 (explanation follows):

A8: 1 B8: =B3 C8: =-B5 D8: =B8*B1 E8: =C8-D8 F8: =B8-E8

Adjust the width of columns B, C, D, E and F as needed.

-Explanation-

In cell A8, we're setting the value of the month to 1. On subsequent rows, we'll increment the month up 1 unit at a time.

In cell B8, we are copying the opening balance of our loan down from cell B3.

In cell C8, we are copying the monthly payment from cell B5. For clarity's sake, it might be easier to work with this value as if it were a positive number. To convert this value to a positive number, we put a minus sign out in front of the cell address (think back to junior high school math class: two negatives make a positive).

In cell D8, we're taking the current loan balance and multiplying by the monthly interest rate (from cell B1) to calculate this month's interest.

In cell E8, we're subtracting the interest portion of the payment amount from the total loan payment in order to calculate the principal (amount of payment used to pay down the loan balance).

And finally, in cell F8, we're subtracting the principal from the loan balance to obtain this month's closing loan balance.

Now, move your cell pointer to cell A9. Type the following values on this row (explanation follows):

A9: =A8+1 B9: =F8 C9: =C8 D9: =B9*$B$1 E9: =C9-D9 F9: =B9-E9

-Explanation- In cell A9, we've written an equation to increment the value of the month up 1 from the value on the previous row. We'll be able to copy this formula down column A and it will automatically enter a new number on each row.

The opening balance of our loan for this month should be the same as last month's closing loan balance. In cell B9, we have written a formula that will copy the previous month's closing balance down to this cell. We'll be able to copy this formula down column B and it will automatically transfer the previous month's closing balance into the appropriate cells in this column.

In cell C9, we are copying the monthly payment from the cell above. We should be able to copy this formula down column C to carry the monthly payment forward.

In cell D9, we're taking the current loan balance and multiplying by the monthly interest rate (from cell B1) to calculate this month's interest. B1 was written as an absolute value (with dollar signs in front of the B and the 1 to prevent that address from changing when we copy this formula down column D.

In cell E9, we're subtracting the interest portion of the payment amount from the total loan payment in order to calculate the principal (amount of payment used to pay down the loan balance). We should be able to copy this formula down column E as far as necessary with no difficulties.

And finally, in cell F9, we're subtracting the principal from the loan balance to obtain this month's closing loan balance. This formula should copy nicely down through column F.

To finish our amortization table, all we'll need to do is copy the formulas on row 9 down to as many subsequent rows as we have payments remaining. For example, if your loan has 60 payments, we will need to make sure our amortization table has 60 rows (one for each payment). We have already entered the first two rows, so we will only need to make 58 more copies of row 9.

To copy row 9, you will first need to select the entire row. To do so, place your mouse in the middle of cell A9. Make sure the mouse looks like a white cross. Then, hold down the left mouse button and drag your mouse to the right until you reach the right edge of cell F9. The entire row (from A9 to F9) should be highlighted.

You should see a small black square (the copy handle) in the lower right corner of cell F9. Position your mouse over this copy handle and the mouse pointer should change into a black cross. Drag the copy handle down as many rows as you think you'll need, and release.

Voila! An instant amortization table.

If you have too many rows at the end of your amortization table, the closing balance will go negative. To eliminate extra rows, select them with your mouse and strike the DELETE key on your keyboard to clear their contents.

If you do not have enough rows, the closing balance will still be positive. To add more rows and get that closing balance down to 0, select the last row of your amortization table with your mouse and drag the copy handle down until the number of rows is adequate.

Now, try changing the values in cells B1 through B4 to see the effect these numbers have on the amortization. Also, consider moving to the bottom of column D and then using your autosum button to calculate the total amount of interest the loan will be costing you. print. You are now ready for quiz #10

Ag Technology – Taylor Spreadsheet Lesson #10 Page #9