Financial Function Categories
Excel boasts hundreds of functions spanning numerous specialties, from math to text manipulation. Focusing on the sweet spots delivers the most modeling utility:
Time Value of Money – Calculates present value, future value, internal rate of return, and discounted cash flows. PV, FV, NPV and XNPV live here.
Cash Flow Analysis – Computes various profitability and liquidity metrics. IRR, PP, and ROI functions reside in this group.
Loan Calculations – Handles periods, interest rates, and loan payments. PMT, IPMT, and CUMIPMT functions are examples.
Depreciation – Calculates declining balance and straight-line methods. SLN DB functions to handle these tasks.
Securities Valuation – Determines theoretical values, yields, and rates for stocks, bonds, and portfolios. YIELD, PRICE, and DURATION functions, among others.
Focus your Excel function learning on these critical financial categories. They will prove indispensable in modeling.
#1: NPV – Net Present Value Function
NPV ranks among the most important and frequently used financial functions in Excel. It calculates a project or investment’s net present value given expected periodic cash flows and a discount rate.
Syntax: =NPV(Discount_Rate, Cash_Flow_1, Cash_Flow_2, …)
Example:
A 3-year project requires an initial $10,000 investment. It generates annual cash flows of $5,000, $7,000, and $6,000 over Years 1-3. Using a 5% discount rate, the NPV equals:
=NPV(5%,-$10,000,$5,000,$7,000,$6,000) = $1,683
This positive NPV signals an economically profitable investment.
NPV models the time value of money – cash earned today is worth more than future cash flows due to potential reinvestment. NPV discounts those future cash flows into present value terms to aid decision-making.
Modeling Tip: Use NPV to evaluate project/investment viability and quantify how changing inputs like discount rates or cash flows impact value.
#2: IRR – Internal Rate of Return
IRR determines the discount rate at which an investment or project’s NPV equals zero. It represents the expected compound annual growth rate reflecting an investment’s profitability.
Syntax: =IRR(Cash_Flow_0, Cash_Flow_1, …)
Example:
If a 3-year project requires a $20,000 upfront investment and generates annual cash flows of $10,000, $14,000, and $16,000, the IRR equals:
=IRR(-$20,000, $10,000, $14,000, $16,000) = 36%
This high IRR suggests an extremely profitable investment opportunity since the 36% IRR well exceeds typical discount rates.
IRR offers a shortcut to gauge investment attractiveness. Compare IRRs across projects to quickly rank opportunities rather than manually calculating NPVs.
Modeling Tip: Use IRR to easily assess and compare expected investment returns when screening projects.
#3: XNPV – Net Present Value for Irregular Cash Flow Schedules
XNPV works exactly like NPV but allows modeling NPV for cash flows occurring at irregular intervals.
Syntax: =XNPV(Discount_Rate, Dates, Cash_Flows)
Example:
An equipment purchase costs $10,000 upfront. It generates proceeds of $3,000, $5,000, and $8,000 on 10/31/20X1, 2/28/20X2, and 6/30/20X2 respectively.
With a 10% discount rate, XNPV equals:
=XNPV(10%,{0, “10/31/20X1″,”2/28/20X2″,”6/30/20X2”},{-$10,000,$3,000,$5,000,$8,000}) = $1,315
XNPV accommodates uneven or seasonal cash flows when discounting to present value. Simpler NPV assumes equal periodic cash flows.
Modeling Tip: Use XNPV instead of NPV for modeling discounted cash flows with irregular timing like certain construction projects, legal case settlements, product launch milestones, etc.
#4: XIRR – Internal Rate of Return for Irregular Cash Flow Schedules
Complementing XNPV, XIRR calculates IRR for irregular cash flow intervals instead of constant periods.
Syntax: =XIRR(Cash_Flows , Dates)
Example:
Based on the same uneven cash flows above, XIRR is:
=XIRR({-$10,000,$3,000,$5,000,$8,000},{“10/31/20X1″,”2/28/20X2″,”6/30/20X2”}) = 45.2%
XIRR enables easily measuring ROI without adjusting models to fixed periods. The closest alternative requires manually trying different discount rates in XNPV to determine the IRR.
Modeling Tip: Use XIRR to quickly measure return for uneven cash flow schedules where normal IRR will fail.
#5: FV – Future Value Function
FV calculates a cash flow’s future value after applying compound growth over several periods. It models how money might grow over time at a set rate.
Syntax: =FV(Growth_Rate, #_Periods, Initial_Investment, Optional_Periodic_Contributions)
Example:
How much would $10,000 invested today grow after 10 years at a 6% annual interest rate with $500 contributed monthly?
=FV(6%/12,10*12,$10,000,$500) = $208,185
This models compound growth on the initial deposit over 10 years plus the compounded contributions.
Modeling Tip: Use FV to project things like savings balances, investment growth, retirement funds, and other compound growth scenarios.
#6: PV – Present Value Function
PV calculates the present value of a series of future cash flows given a specified discount rate. It mirrors FV by discounting instead of compounding.
Syntax: =PV(Discount_Rate, #_Periods, Future_Value, Optional_Periodic_Contributions)
Example:
What is the present value of receiving $20,000 in 5 years, given a 4% annual discount rate?
=PV(4%/12, 5*12, $20,000) = $17,556
This shows that $17,556 deposited today at 4% interest will grow to the specified $20,000 future sum.
Modeling Tip: Apply PV to value things like contracts, leases, annuities, and other future cash transactions in today’s terms.
#7: PMT – Periodic Payment Amount for Loans
PMT calculates the fixed periodic payment amount required to repay a loan with fixed interest and principal payments over its lifetime.
Syntax: =PMT(Interest_Rate, #_Periods, Principal_Amount)
Example:
What monthly payment is needed to repay a $100,000 loan over 15 years at a 6% APR?
=PMT(6%/12,15*12,100,000) = $1,048
PMT provides a fixed monthly payment to sustainably service the loan based on its rate, term, and amount borrowed.
Modeling Tip: Use PMT to calculate mortgage payments, auto loans, equipment leases, or other standard debt products with fixed periodic repayment schedules.
#8: RATE – Interest Rate Required to Discount Future Values to Present Value
RATE determines the interest rate required to reduce a series of future cash flows to a specified present value. It flips arguments from PV and solves for the rate.
Syntax: =RATE(Total_#_Periods, Periodic_Contribution, Present_Value, Future_Value)
Example:
What rate discounts $20,000 received in 5 years to a present value of $17,556?
=RATE(5*12,0,-17556,20000) = 4.00%
RATE calculates the equivalent inverse of PV, finding the required rate rather than the present value.
Modeling Tip: Use RATE to infer discount rates and yields from spot rates and future values. Helpful when a discount factor is missing.
#9: IPMT – Interest Payment for a Loan Period
IPMT calculates the interest portion of a fixed loan payment for a given period. This isolates interest from total payment comprising interest plus principal.
Syntax: =IPMT(Interest_Rate, Period, #_Periods, Present_Value)
Example:
What is the interest portion of the 1st monthly $1,048 payment on a $100,000 6% 15-year loan?
=IPMT(6%/12,1,15*12,100,000) = $500
IPMT breaks down debt service into pure interest. Subtract IPMT from the total payment (PMT) to derive principal reduction.
Modeling Tip: Use IPMT to analyze how loans amortize over time. Build loan amortization schedules showing the evolving interest/principal breakdown.
#10: ROUNDUP/ROUNDDOWN – Round to Nearest Multiple
ROUNDUP and ROUNDDOWN round values up or down to the nearest multiple. This creates clean, rounded figures to the appropriate degree of precision.
Syntax: =ROUNDUP/ROUNDDOWN(Value,Nearest_Multiple)
Example:
Rounding $1,234.56 up to the nearest $10 gives:
=ROUNDUP($1,234.56,$10) = $1,240
Rounding it down to the nearest 10 gives:
=ROUNDDOWN($1,234.56,$10) = $1,230
Modeling Tip: Use ROUNDUP and ROUNDDOWN to build clean consolidated views free of decimal minutiae. Adjust the increment argument to round to 100s, 1,000s, etc.
Additional Complementary Financial Functions
While these 10 financial functions form a strong core, many supplemental functions deserve exploration:
- IFERROR – Catches/traps errors rather than breaking
- VLOOKUP – Pulls data from tables into analyses
- SUMIFS – Totals data conditionally
- DATE – Provides current date stamping
- YEARFRAC – Calculates partial year elapsed
- PRODUCT – Multiplies ranges
- SUMPRODUCT – Conditionally sums products
- IFS – Evaluates multiple if/then conditions
The best way to build expertise is through hands-on application. Incorporate new financial functions into models and observe how they enrich the analysis.
Developing Well-Rounded Financial Modeling Skills
Simply memorizing function syntax doesn’t grow financial modeling abilities. True skills development requires learning functions in context by:
- Studying examples demonstrating real-world usage
- Incorporating functions into actual models and analyses
- Observing how tweaking parameters impacts output
- Testing uncommon parameter combinations to grasp nuances
- Extending basic functions with advanced nested formulas
Over time, functions evolve from intimidating symbols into flexible modeling tools. Patience and hands-on usage breed mastery.
Tie It All Together
Mastering Excel’s vast library of financial functions unlocks immense modeling power. Functions like NPV, IRR XNPV, PMT, FV, and more provide the building blocks to construct complex cash flow models from the ground up.
Practical use cases reveal nuances in how parameters impact output. Over time, functions evolve from intimidating symbols into powerful cash flow modeling tools.
So expand your function repertoire beyond just SUMs and AVERAGEs. Tap into Excel’s specialized financial operators to take your models to the next level.
However, merely learning function syntax represents only the first step. Developing true modeling mastery requires extensive hands-on practice across diverse applications.
Try building a loan amortization table projecting future interest and principal payments. Or create a retirement planning model compounding contributions over decades. Constructing your own analyses cements learning in a lasting way.
Additionally, do not simply mimic standard use cases verbatim. Tweak parameters to probe boundary behavior and enhance intuition for function performance in edge cases.
For example, supply an exceptionally long term to PMT and observe when output changes materialize. Or, provide a high rate to FV and note when compounding explosions occur.
Finally, interweave multiple complementary functions together to build robust models. For instance, incorporate VLOOKUPs into a cash flow schedule driven by changing assumptions. Or, nest IF statements within NPV formulas to toggle scenarios.
Layering functions generates sophisticated models not feasible through individual functions alone.
So do not limit yourself to standalone examples. If you truly wish to master Excel’s financial functions, embrace creative modeling challenges that build expertise through immersive usage in diverse scenarios.
