Blog Home / Financial Terms / Excel for Finance: A Comprehensive Guide to the Top 5 Most Popular Functions

# Excel for Finance: A Comprehensive Guide to the Top 5 Most Popular Functions

Excel is an indispensable tool for finance professionals, with a wide range of functions that can help analysts and investors make informed decisions about investments, financing, and budgeting.

In this blog post, we’ll take a comprehensive look at the five most popular Excel functions in finance, with fully worked examples and step-by-step instructions for using each function.

## 1. =SUM: Adding Up Values in a Range of Cells

The =SUM function is used to add up the values in a range of cells. This is a simple but essential function that is commonly used to calculate totals or sums of values in a financial model or budget.

Here’s the syntax for the =SUM function:

Copy code

=SUM(range of cells)

For example, if you have a range of cells with values in them (e.g. A1:A10), you can use the =SUM function to add up all of those values.

The formula would be =SUM(A1:A10).

Let’s take a look at a fully worked example of the =SUM function in action. Suppose you have a budget with the following expenses:

 Expense Amount Rent $1,000 Utilities$200 Groceries $300 Entertainment$100

You can use the =SUM function to add up all of these expenses to get a total budget.

Here’s how you would do it:

1. In cell D2, enter the formula =SUM(B2:B5).
2. Press Enter to see the result: $1,700. In this example, the =SUM function added up the values in cells B2 through B5 to give a total budget of$1,700.

## 2. =PMT: Calculating Payment Amounts for a Loan

The =PMT function is used to calculate the payment amount for a loan based on the loan amount, interest rate, and number of payments. This is a common function that is used to calculate the monthly payment for a mortgage or other loan.

Here’s the syntax for the =PMT function:

Copy code

=PMT(interest rate, number of payments, loan amount)

For example, if you have a 30year mortgage with a 4% interest rate and a loan amount of $250,000, your monthly payment would be =PMT(0.04/12, 360, 250000), or$1199.10.

Lets take a look at a fully worked example of the =PMT function in action.

Suppose you have a 5year car loan with a 3% annual interest rate and a loan amount of $20,000. You want to know what your monthly payment will be. Here’s how you would use the =PMT function to calculate it: 1. In cell B2, enter the formula =PMT(0.03/12, 60, 20000). 2. Press Enter to see the result:$363.32.

In this example, the =PMT function calculated the monthly payment for a 5year car loan with a 3% annual interest rate and a loan amount of $20,000 to be$363.32.

## 3. =FV: Calculating the Future Value of an Investment

The =FV function is used to calculate the future value of an investment based on an initial investment, periodic interest rate, and number of periods. This function is often used to project the value of an investment at a future date.

Here’s the syntax for the =FV function:

=FV(interest rate, number of periods, payment, present value, type)

For example, if you have a savings account with a 3% annual interest rate and you want to know how much you’ll have in 5 years if you save $500 per month, you would use the following formula: =FV(0.03/12, 60, -500, 0, 0), which would give you a future value of$36,317.44.

Let’s take a look at a fully worked example of the =FV function in action. Suppose you have an investment account with a 4% annual interest rate and you want to know how much it will be worth in 10 years if you contribute $1,000 per year. Here’s how you would use the =FV function to calculate the future value: 1. In cell B2, enter the formula =FV(0.04, 10, 0, -1000, 0). 2. Press Enter to see the result:$14,386.24.

In this example, the =FV function calculated the future value of an investment with a 4% annual interest rate and $1,000 per year in contributions to be$14,386.24 in 10 years.

## 4. =NPV: Calculating the Net Present Value of an Investment

The =NPV function is used to calculate the net present value of an investment based on a series of cash flows and a discount rate. This function is used to determine the value of an investment or project in today’s dollars.

Here’s the syntax for the =NPV function:

=NPV(discount rate, value1, value2, …)

For example, if you have a project with an initial investment of $100,000 and expected cash flows of$30,000 per year for the next three years, you can use the =NPV function to determine the present value of those cash flows. Assuming a discount rate of 10%, the present value would be =NPV(0.1, 30000, 30000, 30000, 100000), or $75,557.14. Lets take a look at a fully worked example of the =NPV function in action. Suppose you have a project with an initial investment of$50,000 and expected cash flows of $20,000 per year for the next five years. You want to determine the net present value of this project assuming a discount rate of 8%. Here’s how you would use the =NPV function to calculate it: 1. In cell B2, enter the formula =NPV(0.08, 20000, 20000, 20000, 20000, 20000, -50000). 2. Press Enter to see the result:$64,215.35.

In this example, the =NPV function calculated the net present value of a project with an initial investment of $50,000 and expected cash flows of$20,000 per year for the next five years, assuming a discount rate of 8%, to be $64,215.35. ## 5. =IRR: Calculating the Internal Rate of Return for an Investment The =IRR function is used to calculate the internal rate of return for an investment based on a series of cash flows. This function is used to determine the rate of return on an investment or project. Here’s the syntax for the =IRR function: =IRR(values, guess) For example, if you have an investment with the following cash flows:$10,000 in year 1, $15,000 in year 2,$20,000 in year 3, and an initial investment of $30,000, you can use the =IRR function to determine the internal rate of return. The formula would be =IRR(30000, 10000, 15000, 20000), which would give you an internal rate of return of 31.7%. Lets take a look at a fully worked example of the =IRR function in action. Suppose you have an investment with the following cash flows:$5,000 in year 1, $10,000 in year 2,$15,000 in year 3, $20,000 in year 4, and an initial investment of$25,000.

You want to determine the internal rate of return on this investment.

Here’s how you would use the =IRR function to calculate it:

1. In cell B2, enter the formula =IRR(-25000, 5000, 10000, 15000, 20000).
2. Press Enter to see the result: 23.2%.

In this example, the =IRR function calculated the internal rate of return on an investment with the specified cash flows and initial investment to be 23.2%.

These are the five most popular Excel functions in finance, and they are all incredibly useful tools for analysts and investors. Whether you’re calculating loan payments, projecting future investment values, determining the present value of a series of cash flows, or calculating the internal rate of return on an investment, these functions can help you make informed decisions and optimize your financial strategies.

We hope this blog post has been helpful in introducing you to these popular Excel functions and providing fully worked examples and step-by-step instructions for using them. With a little practice and a lot of problem-solving, you’ll be a pro at using Excel for finance in no time!

References

1. Microsoft Office Support: “Excel functions (by category)” https://support.office.com/en-us/article/excel-functions-by-category-bb942a8b-7771-4a97-b07b-c8e1c20f6b57
2. Investopedia: “Net Present Value (NPV)” https://www.investopedia.com/terms/n/npv.asp
3. Corporate Finance Institute: “Internal Rate of Return (IRR)” https://corporatefinanceinstitute.com/resources/knowledge/finance/internal-rate-of-return
Philip Meagher