in this video we'll create scenarios to determine whether you should pursue a project
create a full loan schedule and calculate how much you need to buy your dream car
all using excel's financial formulas and to apply these formulas we'll be using our latest startup
idea a lemonade stand so let's get into it and try not to skip around so you don't get lost
so our plan is to work on this lemonade stand project for four years as that's the time we'll
be in university after which we'll get a full-time job but we're not quite sure if this is right for
us so first we need to determine how financially viable it is but because we're not quite sure what
our cash flows will look like we actually created three different scenarios a best case a base case
and a worst case and obviously in year zero it's going to be negative that's because we need to
have startup investments right whether that be a lemonade stand whether that be the equipment
and so on after which will hopefully start to generate money now we'll use the choose formula
on excel to be able to change scenarios instantly so for that up here on the choose scenario we
would type the one the two and the three and that would hopefully give us these different
cash flows so let's press one for now and from there down over here we'll go equals choose
press the tab key the index number is going to be the scenario that we want to choose
and then press the f4 key as that's going to lock it for us press the comma key
the value number 1 is the best case the value number 2 is the base and the third one is the
worst case now close the brackets press enter and then from there you'll go ctrl c and then move it
across to the other side ctrl v and now you're going to have all the different cash flows for
for the scenario number one as you can see here if we change that to scenario number two then that's
going to change to these ones over here and just to make sure somebody doesn't put anything silly
like a four in here which is actually just going to break the cash flows for us we're going to do
a data validation so for that just go to alt avv and from there you're going to put allow a list
because that's what we want and the numbers we're going to want is just one two and three
one comma two comma three press the enter key now you're gonna see that you can only press the
the different scenarios that you have here from the drop down list in case somebody tries to put
something else like a four here you're gonna see that they get a pop-up sign so that's what we want
all right so to assess whether the project is viable under scenario two which is the base
case scenario all we gotta do is go alt equals and that's going to sum the cash flows for us and if
it's positive that's good to go but unfortunately that's not quite right and that's because of this
concept called the time value of money which basically says that a dollar today is worth more
than a dollar in the future that's because you can invest that dollar and hopefully grow it over time
and so if you have a dollar in the future you actually need to discount it back to the present
value and for that we'll use the discount rate and the formula that we'll use to discount these cash
flows is called the npv which is short for the net present value so let's go equals npv press the top
key from there the rate is the discount rate that we got press the comma key the value number one
it's actually going to be from year one to year four get those values
close the brackets and then plus the negative value which is on here zero press the top key and
that should give you a thousand four hundred and two and you might wonder why we didn't put all the
values together for the mpv formula so instead we added the zero at the very end here and the
reason for that is if we put all of them together it would essentially be accounting for year zero
as year one and so all the years would actually be misplaced by one which isn't quite accurate
so we've got a positive mpv now what does that mean in short it means that it's expected to
earn a profit and so you should go ahead and pursue that project on the other hand if it's
negative you obviously shouldn't but usually when we pursue a project we don't just want the dollar
value of it but we also want the percentage return and for that we'll use the irr which
is short for the internal rate of return so once on the cell we'll go equals irr press the top key
and the values are just these values over here press enter and that should give you that 13
that 13 represents the annual return of the lemonade stand now is that good usually you
have to compare versus the discount rate so if the irr is greater in the discount rate that means
that the project is expected to be profitable and so you should go ahead and pursue it what we just
did with the mpv and the irr is what's known as capital budgeting and there is a third method to
this which is known as the payback period which is simply how long does it take to recover the cost
of the investment and companies use these methods to assess whether it's worth pursuing new projects
these projects might range from opening up a new office a new factory or even a new product line
so now that it's all dynamic we can go ahead and change the different scenarios and everything is
going to change with it as you can see if we go to the worst case scenario which is scenario three
you'll see that all of the figures are actually negative so we shouldn't go ahead with the project
under those assumptions all right so we've determined that this project is viable and we
want to go ahead and get started but we're college students so we don't have any money and so we need
to go to a bank and ask for a five thousand dollar loan which is our base case scenario
and here's the terms that the bank will be offering us we got a four year loan for five
thousand dollars at five percent paid monthly so to convert everything into monthly we'll go
equals five percent divided by twelve and for the number of payments is going to be equals to
four for the four years times twelve now on the output side we have some important information
that we should know to do with this loan and so for the monthly payment we'll go equals pmt
which is short for payment press the tab key the rate that we want is the monthly rate remember
press the comma key the number of periods is the 48 press the comma key the pv is the present value
and so that's five thousand dollars that they're giving us so it's a five thousand and you can see
that the fv and the type actually have brackets in them that means that they're not necessary for
this formula to work and so we'll just close it there because we don't have a future value
press the enter key that's a monthly payment of 115 dollars that total monthly payment actually
consists of the principal and the interest if you don't know the difference the principal is
essentially the actual loan amount that you're paying back so if you borrowed 5000 how much of
that are you paying back each month while on the other hand the interest has to do with the fee
that they charge for lending you that money essentially so let's calculate both of them
and i've just selected around a month in month 24 just so you can see equals ppmt
which is going to be for the payment for the principal the rate is going to be that same rate
the pair here that you can see is actually the period so in our case we said we want month 24.
press the comma key the number of periods is up 48 press a comma and the pv is that same
five thousand you can press enter there that's going to give you the principal paid in month 24.
on the other hand we have the interest for that we'll go i p m t the rate is the same right here
the periods is 24 again press the comma number of periods is 48
and the pv is just the present value people usually like to see the breakdown of how
much are they paying in principle versus interest similarly sometimes they like to
see the total amount of interest that they're going to be paying for that you can use this
cumulative function so let's look into that we'll go equals [ __ ] ipmt that's the one
the rate is the 0.42 here press the comma key number of periods is 48 the pv is the 5000
coma the start period is actually the first period because we want the cumulative so
press the comma key there the last period is the 48 press the comma key and then we actually want
the end of the period so we'll press the zero here press the close and there you go one thing that
would be beneficial for us to have is knowing the remaining balance of the loan so how much have we
paid how much do we need to pay back and so for that we'll be using a loan amortization table
so here we got the payment number which is essentially which period are we in so we'll go one
two and we'll actually drag it all the way down to 48 once we go to here we'll go all the way down
for the payment amount we're actually going to be equals we already have a calculator
up here which is the monthly payment and so we're actually gonna make it negative
and select it there press the f4 key press enter the reason i made it negative is so
all the numbers are actually just on positive here so it's just a lot easier to see for the
interest that we have here it's just going to be the monthly interest rate which is the 0.42
times the loan amount which is going to be 5 000 press the enter key the principal is
going to be the difference between the payment amount and the interest so this one minus this
one here and then the remaining balance is going to be equals to the loan amount which is the 5000
minus the principal which is the amount that we've already paid back in period one for period two for
the payment amount we can actually just select it and double click here and it's going to fill
down all the way to the bottom as you can see by pressing control down and control backup
for the interest is going to be equals to the monthly interest rate over here we're going to
lock it by pressing the f4 key times the remaining balance because the interest is actually on the
remaining balance it's not on the total amount of the loan press the enter key for the principle
again it's going to be the difference so one minus the other and then for the remaining balance
here what we're going to do is equals the current remaining balance minus the principle press enter
once we have these we can select all three and then just double click down here and it's going
to drag them all the way down now if we did this exercise correctly when we press the control down
arrow it should give us zero as the remaining balance that is indeed the case so we did it
well and one final check you can do here is to sum all of the interest payments that you have
and see if that's the same as the cumulative interest so for that we'll just press equals sum
and we're just going to sum all of these press the ctrl shift down arrow to get to the bottom press
enter so that number should be the exact same one as this one and indeed that is the case very nice
some other useful excel formulas include the present value and the future value
and suppose that at the end of university we want to have ten thousand dollars saved up as that's
the cost of a secondhand car that we want and so we want to know how much money do we need today
to make that happen and our bank is giving us a seven percent interest rate to leave our money
there now that seven percent is not realistic it's just for this example so we'll go equals pv press
the tab key the rate is at seven percent comma the number of periods is four years comma key
payment this is the monthly payment that we would be paying in our case we are not paying anything
monthly so we'll go with zero press the comma key and the future value is how much we expect
to have in the future so that's a ten thousand and that equates to around seven thousand six hundred
so that means that we need about seven thousand six hundred to make our card dreams come true
in four years time similarly let's say that we want to find out how much this 7600 would give
us in 45 years time which is when we hope to retire and eventually buy an even better car
say so for that firstly we're just going to go equals negative 7629 so just link it here
press the enter key and for the fe go equals fv press the top key the rate is a seven percent
number of periods is 45 for the years payment is zero comma and the present value is this one here
press the enter key that gives you 160 000 with which you'll probably be able to buy
a decent car but it is in 45 years time if you want to know more about excel formulas
check out this other video i made over here if you want to know more about valuation
methods specifically the discounted cash flow check out this video over here that's all for
this one hit the like hit the subscribe if you liked it i'll catch you in the next one