While developing financial models, Excel is one of the most important tools around and has some very powerful functions related to data analysis, manipulation, and visualization. Whether it’s corporate finance modelling, valuations, or investment analyses, the right set of Excel functions will significantly boost the efficiency and accuracy of your financial models.
Here are the top Excel functions that every financial modeler should know:.
1. Valuations and Investment Analysis with Functions of Finance
a) NPV: Net Present Value
The NPV function is the value of a stream of future cash flows in present time, discounted at a quoted rate. This is another very important function in dealing with investment opportunities and also capital budgeting.
Formulas: `=NPV(rate, value1, value2,.)`
Application To evaluate an investment or project’s profitability based on its future expected cash flows and a discount rate.
b) IRR (Internal Rate of Return)
The IRR formula, instead calculates the discount rate at which the net present value for cash flows equals zero. That is very important in coming up with a decision whether it is worthwhile to invest into a certain investment or project.
– Formula: =IRR(values, [guess])
– Application: Find the periodic rate of return on a loan or an investment in a project or a business buy.
c) PMT (Payment for Loan or Investment)
PMT will return the payment on a loan or an investment, based upon periodic fixed payments and a fixed interest rate.
Use: Use PMT to calculate the monthly loan payment and how much to save periodically toward some target amount on a certain future date.
2. Statistical and Data Functions
a) AVERAGE The ‘AVERAGE’ function calculates the average of a set of numbers. This is one of the most typical applications of historical return or cash flow data.
Application: In each point where greater than one scenario is found in the financial model. The above can either be a base case or the best-case scenario, or it could even be the worst-case while calculating the variation of input parameters in that case.
b) AND/OR
The ‘AND’ and ‘OR’ functions link two or more conditions. If any of the applicable conditions are true, they return TRUE. The ‘AND’ function returns TRUE only when all conditions are true. The ‘OR’ function returns TRUE when any one of the conditions is true.
Master any such crucial Excel finance modeling functions. You would understand how to build, review, and improve financial models assisted by such functions from using the most straightforward applications involving simple calculations up to more complex and advanced functions like INDEX/MATCH and Goal Seek. All of the above functions help in calculating and, therefore, more precisely estimating potential investment as well as future performance, or a way of doing more advanced and sophisticated scenario analysis through models that are improved in finances. The main strength of the Excel is not in its versatility, though that is part of the importance, but rather in the fact that these functions will enable a modeler to manipulate and test financial data and present it accordingly.