Calculate How Long It Will Take To Pay Off Loan

Calculate How Long It Will Take To Pay Off Loan – Factoring the Time Value of Money with Excel This technology workshop shows how to use a variety of Excel functions to perform the calculations required for this analysis. Daniel R. Brickner, CPA, Ph.D., and Lois S. Mahoney, CPA, Ph.D.

Many financial decisions are made without considering the time value of money. Whether advising a client on financial planning for retirement, advising a client on a business investment opportunity or calculating the present value of future leases, accounting professionals must understand how to efficiently and accurately perform the appropriate time value of money analysis calculations.

Calculate How Long It Will Take To Pay Off Loan

This article provides example scenarios and explains different approaches to calculating the time value of money using Microsoft Excel. The Excel tools discussed here include the FV, FVSCHEDULE, PV, NPV, PMT, RATE and NPER functions.

Annual Percentage Rate (apr)

For simplicity, this article focuses on examples related to personal financial planning. The CPA can then apply the features and techniques shown to other scenarios. Examples include calculating the present value of long-term receivables, performing a goodwill impairment assessment, determining the appropriate selling price of a bond, and estimating the internal rate of return for capital planning decisions.

Excel’s FV and FVSCHEDULE functions can be used to calculate the future value of money, whether the application involves a lump sum (ie, one payment or deposit) or an annuity (ie, several equal payments or deposits at equal intervals) . These functions can also be used to determine the expected future value of a cash investment account, IRA or 401(k).

Your client has $500,000 in an IRA and has asked you to estimate its value when the client reaches retirement age in eight years, assuming a return of 6% annually.

Using the FV function, as shown in cell B12 of the “Using the FV and FVSCHEDULE Functions” screenshot, the formula =FV(0.06, 8, 0, -500000) is used to calculate that the client’s IRA will grow to $796,924 By the end of eight years assuming a return of 6% per year. Note that sometimes variables in time value functions are entered as negative numbers, such as negative $500,000 in this scenario, because it represents an investment equal to a cash outflow.

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This example shows how to use the FVSCHEDULE function in Excel to calculate the future value of a lump sum that allows the annual rate of return to change over the savings period.

Your client has $500,000 in savings and has eight years left until retirement. As an investment strategy, the client would like to adjust the asset allocation of his investments over time, evolving from a more aggressive strategy in earlier years to a more conservative investment approach as he approaches retirement age. Thus, it predicts an annual return of 10% in the first two years of the investment period and a return of 8%, 6% and 4% in each of the following two-year periods. Using the FVSCHEDULE function, as shown in cell B30 of the “Using the FV and FVSCHEDULE Functions” screenshot, the formula =FVSCHEDULE(500000) calculates that the client’s retirement savings balance will grow to $857,593 after eight years using the compound interest. This time period.

Example A: Your client wants to contribute $12,000 to a retirement account at the beginning of each year for the next 20 years and earn a 6% annual return. The formula in cell B13 in the screenshot “Calculating the future value of an annuity using the FV function” =FV(0.06, 20, -12000 .0, 1) calculates that the client’s retirement account will grow to $467,913 at the end Year. 20 years assuming an annual return of 6%. Note that this row is marked with 1 since payments are made at the beginning of each year.

Example B: A more likely scenario might be that your client makes monthly payments into his retirement account. Let’s say your client deposits $1,000 at the end of each month for 20 years and earns 6% per year on his investments during that time. Using the formula as shown in cell B26 of the screenshot “Calculate the future value of an annuity using the FV function,” =FV (0.005, 240, -1000 ,0, 0), you would have $462,041 in your account in the End of the 20-year term. Note that this type is coded differently than Example A because this example represents an ordinary pension rather than a pension liability scenario.

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Case C: An even more likely scenario would be if your clients already had retirement savings and asked you to predict the future value of their current savings combined with additional monthly contributions. Using the information from Example B, assume that your client has already accumulated $200,000 in retirement savings. In this example, when using the FV function, you would enter -$200,000 as the PV amount. The formula in cell B39 of the “Calculating the future value of an annuity using the FV function” screenshot =FV(0.005, 240, -1000, -200000 .0) calculates the future value of your client’s savings, including existing savings, To be $1,124,082 assuming a return of 6 percent per annum.

In these cases, the CPA will review the calculations with their clients and assess whether the clients are meeting their retirement objectives. For example, a CPA may need to advise clients to increase their savings rate, delay their retirement age, or change their investment strategy to meet their retirement living plans. Excel can be easily modified to accommodate such a what-if analysis.

The PV function in Excel allows users to determine what future cash flows are worth in today’s dollars, whether the application involves a lump sum or an annuity. This concept is used when you try to determine, among other things, the present value of the price of an asset that will be paid in the future, or to calculate the monthly payments for a loan. The NPV function can be used to calculate the present value of unequal future cash flows.

Example A: A client has a desired retirement savings goal of $2 million to reach in seven years. He plans to make only one deposit in his account and the annual return is expected to be 6% per year. Using the PV function, the formula in cell B12 of the “Using the PV Function,” screenshot =PV(0.06, 7, 0, -2000000) calculates that the client must deposit $1,330,114 into his retirement account today to reach his goal. $2 million in seven years.

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The examples given so far illustrate the use of Excel’s time value of money financial functions in providing financial planning services to clients. Excel’s financial features can also be useful for CPAs when providing management consulting and assurance services to clients, whether advising how to record transactions or evaluating the adequacy of a client’s accounting records and financial statements. Example B below provides one such example.

Example B: A customer purchased equipment and signed a note to pay the equipment manufacturer $100,000 at the end of four years. The client has asked you for help in determining the amount to be recorded as equipment cost, assuming that the cost of capital (ie the annual discount rate) is 6%. The result of the formula in cell B24 of the screenshot “Use The PV function,” =PV(0.06, 4, 0, -100000) indicates that the cost of the equipment should be recorded as $79,209.

Example A: Your customer has signed a lease for equipment and you need to assess whether the customer has properly capitalized the amount associated with the lease. The contract calls for four annual lease payments of $25,000 at the beginning of each year and an appropriate annual interest rate of 8%. The result of the formula in cell B13 of the “PV Function vs. NPV Function,” =PV(0.08, 4, -25000 ,0, 1) screenshot shows that the leased asset should be capitalized for $89,427.

In many cases, a customer may have regular but uneven payments. If the payments are not equal, the PV function in Excel cannot be used to effectively solve the problem. However, the NPV (ie net present value) function allows for unequal payments.

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Example B: Assume the same scenario as Example A, except that the lease calls for rent to increase by $1,000 each year. Using the appropriate NPV function for this scenario, =NPV(0.08, 26000, 27000, 28000)+25000, you can calculate that the lease would be capitalized for $94,450, as shown in cell B26 of the “PV Function vs. .”

Excel’s PMT function can be used, among other things, when helping a client determine the amount of monthly contributions to reach a retirement goal or calculate monthly payments to eliminate a loan obligation.

Examples A and B: Your client wants a $1 million balance in a retirement account at the end of 20 years, and you expect an annual investment return of 6%. To determine how your client can achieve this goal, use the formula =PMT(0.06, 20, 0,

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