BAII Plus Tutorial

Part I
The TI BAII Plus is a fairly easy to use financial calculator that will serve you well in all finance courses. This
tutorial will demonstrate how to use the financial functions to handle time value of money problems and make
financial math easy. I will keep the examples rather elementary, but understanding the basics is all that is
necessary to learn to use the calculator. Please note that the design of this calculator has changed slightly over the
years, but it works the same way even if it doesn't match my picture.
Initial Setup
Before we get started, we need to correctly (in my view, anyway) set up the calculator. The BAII Plus comes from
the factory set to assume monthly compounding. That's fine, I suppose, but its better to set it to assume annual
compounding and then make manual adjustments when you enter numbers. Why? Well, the compounding
assumption is hidden from view and in my experience people tend to forget to set it to the correct assumption. Of
course, most people don't recognize a wrong answer when they get one, so they blithely forge ahead. To fix this
problem press 2nd then I/Y and enter 1 when prompted. Now press Enter and then 2nd

CPT to return

to a blank screen. Problem solved.

One other adjustment is important. By default the BAII Plus displays only two decimal places. This is not
enough. Personally, I like to see five decimal places, but you may prefer some other number. To change the
display, press 2nd then . and, when prompted, enter the number of digits you would like to see displayed. You
must then press the Enter to lock in your choice. I would press 2nd

Enter to display 5 decimal

places. That's it, the calculator is ready to go.

If you don't find the answer that you are looking for, please check the FAQ. If it isn't there, please drop me a
note and I'll try to answer the question.
Example 1 Future Value of Lump Sums
We'll begin with a very simple problem that will provide you with most of the skills to perform financial math on
the BAII Plus:
Suppose that you have $100 to invest for a period of 5 years at an interest rate of 10% per year. How much will you
have accumulated at the end of this time period?
In this problem, the $100 is the present value (PV), there are 5 periods (N), and the interest rate is 10%
(I/Y). Before entering the data you need to make sure that the financial registers (each key is nothing more than a
memory register) are clear. Otherwise, you may find that numbers left over from previous problems will interfere
with the solution to this one. Press 2nd

FV to clear the memory. Now all we need to do is enter the numbers

into the appropriate keys: 5 into N , 10 into I/Y , -100 into PV . Now to find the future value simply
press CPT (compute) and then the FV key. The answer you get should be 161.05.
A Couple of Notes
1. Every time value of money problem has either 4 or 5 variables (corresponding to the 5 basic financial
keys). Of these, you will always be given 3 or 4 and asked to solve for the other. In this case, we have a 4variable problem and were given 3 of them (N, I/Y, and PV) and had to solve for the 4th (FV). To solve these
problems you simply enter the variables that you know into the appropriate keys and then press the other
key to get the answer.
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2. The order in which the numbers are entered does not matter.
3. When we entered the interest rate, we input 10 rather than 0.10. This is because the calculator automatically
divides any number entered into I/Y by 100. Had you entered 0.10, the future value would have come out
to 100.501 obviously incorrect.
4. Notice that we entered the 100 in the PV key as a negative number. This was on purpose. Most financial
calculators (and spreadsheets) follow the Cash Flow Sign Convention. This is simply a way of keeping the
direction of the cash flow straight. Cash inflows are entered as positive numbers and cash outflows are
entered as negative numbers. In this problem, the $100 was an investment (i.e., a cash outflow) and the
future value of $161.05 would be a cash inflow in five years. Had you entered the $100 as a positive number
no harm would have been done, but the answer would have been returned as a negative number. This would
be correct had you borrowed $100 today (cash inflow) and agreed to repay $161.05 (cash outflow) in five
years. Do not change the sign of a number using the "minus" key. Instead, use +/- .
5. We can change any of the variables in this problem without needing to re-enter all of the data. For example,
suppose that we wanted to find out the future value if we left the money invested for 10 years instead of
5. Simply enter 10 into N and then CPT

FV . You'll find that the answer is 259.37.

Example 1.1 Present Value of Lump Sums

Solving for the present value of a lump sum is nearly identical to solving for the future value. One important thing
to remember is that the present value will always (unless the interest rate is negative) be less than the future
value. Keep that in mind because it can help you to spot incorrect answers due to a wrong input. Let's try a new
problem:
Suppose that you are planning to send your daughter to college in 18 years. Furthermore, assume that you have
determined that you will need $100,000 at that time in order to pay for tuition, room and board, party supplies, etc. If
you believe that you can earn an average annual rate of return of 8% per year, how much money would you need to
invest today as a lump sum to achieve your goal?
In this case, we already know the future value ($100,000), the number of periods (18 years), and the per period
interest rate (8% per year). We want to find the present value. Enter the data as follows: 18 into N , 8 into I/Y ,
and 100,000 into FV . Note that we enter the $100,000 as a positive number because you will be withdrawing
that amount in 18 years (it will be a cash inflow). Now press CPT

PV and you will see that you need to invest

$25,024.90 today in order to meet your goal. That is a lot of money to invest all at once, but we'll see on the next
page that you can lessen the pain by investing smaller amounts each year.
Example 1.2 Solving for the Number of Periods
Sometimes you know how much money you have now, and how much you need to have at an undetermined future
time period. If you know the interest rate, then we can solve for the amount of time that it will take for the present
value to grow to the future value by solving for N.
Suppose that you have $1,250 today and you would like to know how long it will take you double your money to
$2,500. Assume that you can earn 9% per year on your investment.

This is the classic type of problem that we can quickly approximate using the Rule of 72. However, we can easily
find the exact answer using the BAII Plus calculator. Enter 9 into I/Y , -1250 into PV , and 2500 into FV . Now
press CPT

N and you will see that it will take 8.04 years for your money to double.

One important thing to note is that you absolutely must enter your numbers according to the cash flow sign
convention. If you don't make either the PV or FV a negative number (and the other one positive), then you will get
Error 5 on the screen instead of the answer. That is because, if both numbers are positive, the calculator thinks that
you are getting a benefit without making any investment. If you get this error, just press CE/C to clear it and then
fix the problem by changing the sign of either PV or FV.
Example 1.3 Solving for the Interest Rate
Solving for the interest rate is quite common. Maybe you have recently sold an investment and would like to know
what your compound average annual rate of return was. Or, perhaps you are thinking of making an investment and
you would like to know what rate of return you need to earn to reach a certain future value. Let's return to our
college savings problem from above, but we'll change it slightly.
Suppose that you are planning to send your daughter to college in 18 years. Furthermore, assume that you have
determined that you will need $100,000 at that time in order to pay for tuition, room and board, party supplies, etc. If
you have $20,000 to invest today, what compound average annual rate of return do you need to earn in order to reach
your goal?
As before, we need to be careful when entering the PV and FV into the calculator. In this case, you are going to
invest $20,000 today (a cash outflow) and receive $100,000 in 18 years (a cash inflow). Therefore, we will enter 20,000 into PV , and 100,000 into FV . Type 18 into N , and then press CPT

I/Y to find that you need to

earn an average of 9.35% per year. Again, if you get Error 5 instead of an answer, it is because you didn't follow the
cash flow sign convention.
Note that in our original problem we assumed that you would earn 8% per year, and found that you would need to
invest about $25,000 to achieve your goal. In this case, though, we assumed that you started with only $20,000.
Therefore, in order to reach the same goal, you would need to earn a higher interest rate.
When you have solved a problem, always be sure to give the answer a second look and be sure that it seems likely
to be correct. This requires that you understand the calculations that the calculator is doing and the relationships
between the variables. If you don't, you will quickly learn that if you enter wrong numbers you will get wrong
answers. Remember, the calculator only knows what you tell it, it doesn't know what you really meant.
Please continue on to part II of this tutorial to learn about using the BAII Plus to solve problems involving annuities
and perpetuities.

Part II
In the previous section we looked at the basic time value of money keys and how to use them to calculate present
and future value of lump sums. In this section we will take a look at how to use the BAII Plus to calculate the
present and future values of regular annuities and annuities due.
A regular annuity is a series of equal cash flows occurring at equally spaced time periods. In a regular annuity, the
first cash flow occurs at the end of the first period.
An annuity due is similar to a regular annuity, except that the first cash flow occurs immediately (at period 0).
Example 2 Present Value of Annuities
Suppose that you are offered an investment that will pay you $1,000 per year for 10 years. If you can earn a rate of
9% per year on similar investments, how much should you be willing to pay for this annuity?
In this case we need to solve for the present value of this annuity since that is the amount that you would be willing
to pay today. Press 2ndFV to clear the financial keys. Enter the numbers into the appropriate keys: 10 into N ,
9 into I/Y , and 1000 (a cash inflow) into PMT . Now press CPT

PV to solve for the present value. The

answer is -6,417.6577. Again, this is negative because it represents the amount you would have to pay (cash
outflow) today to purchase this annuity.
Example 2.1 Future Value of Annuities
Now, suppose that you will be borrowing $1000 each year for 10 years at a rate of 9%, and then paying back the
loan immediate after receiving the last payment. How much would you have to repay? All we need to do is to put a
0 into PV to clear it out, and then press CPT

FV to find that the answer is -15,192.92972 (a cash outflow).

Example 2.2 Solving for the Payment Amount

We often need to solve for annuity payments. For example, you might want to know how much a mortgage or auto
loan payment will be. Or, maybe you want to know how much you will need to save each year in order to reach a
particular goal (saving for college or retirement perhaps). On the previous page, we looked at an example about
saving for college. Let's look at that problem again, but this time we'll treat it as an annuity problem instead of a
lump sum:
Suppose that you are planning to send your daughter to college in 18 years. Furthermore, assume that you have
determined that you will need $100,000 at that time in order to pay for tuition, room and board, party supplies, etc. If
you believe that you can earn an average annual rate of return of 8% per year, how much money would you need to
invest at the end of each year to achieve your goal?
Recall that we previously determined that if you were to make a lump sum investment today, you would have to
invest $25,024.90. That is quite a chunk of change. In this case, saving for college will be easier because we are
going to spread the investment over 18 years, rather than all at once. (Note that, for now, we are assuming that the
first investment will be made one year from now. In other words, it is a regular annuity.)
Let's enter the data: Type 18 into N , 8 into I/Y , and 100,000 into FV . Now, press CPT

PMT and you will

find that you need to invest $2,670.21 per year for the next 18 years to meet your goal of having $100,000.
Example 2.3 Solving for the Number of Periods
Solving for N answers the question, "How long will it take..." Let's look at an example:
Imagine that you have just retired, and that you have a nest egg of $1,000,000. This is the amount that you will be
drawing down for the rest of your life. If you expect to earn 6% per year on average and withdraw $70,000 per year,
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how long will it take to burn through your nest egg (in other words, for how long can you afford to live)? Assume that
your first withdrawal will occur one year from today (End Mode).
Enter the data as follows: 6 into I/Y , -1,000,000 into PV (negative because you are investing this amount), and
70,000 into PMT . Now, press CPT

N and you will see that you can make 33.40 withdrawals. Assuming that

you can live for about a year on the last withdrawal, then you can afford to live for about another 34.40 years.
Example 2.4 Solving for the Interest Rate
Solving for I/Y works just like solving for any of the other variables. As has been mentioned numerous times in this
tutorial, be sure to pay attention to the signs of the numbers that you enter into the TVM keys. Any time you are
solving for N, I/Y, or PMT there is the potential for a wrong answer or error message if you don't get the signs right.
Let's look at an example of solving for the interest rate:
Suppose that you are offered an investment that will cost $925 and will pay you interest of $80 per year for the next 20
years. Furthermore, at the end of the 20 years, the investment will pay $1,000. If you purchase this investment, what is
your compound average annual rate of return?
Note that in this problem we have a present value ($925), a future value ($1,000), and an annuity payment ($80
per year). As mentioned above, you need to be especially careful to get the signs right. In this case, both the annuity
payment and the future value will be cash inflows, so they should be entered as positive numbers. The present
value is the cost of the investment, a cash outflow, so it should be entered as a negative number. If you were to
make a mistake and, say, enter the payment as a negative number, then you will get the wrong answer. On the
other hand, if you were to enter all three with the same sign, then you will get an error message,
Let's enter the numbers: Type 20 into N , -925 into PV , 80 into PMT , and 1000 into FV . Now,
press CPTI/Y and you will find that the investment will return an average of 8.81% per year. This particular
problem is an example of solving for the yield to maturity (YTM) of a bond.
Example 2.5 Annuities Due
In the examples above, we assumed that the first payment would be made at the end of the year, which is typical.
However, what if you plan to make (or receive) the first payment today? This changes the cash flow from from a
regular annuity into an annuity due.
Normally, the calculator is working in End Mode. It assumes that cash flows occur at the end of the period. In this
case, though, the payments occur at the beginning of the period. Therefore, we need to put the calculator into Begin
Mode. To change to Begin Mode, press 2nd
press 2nd

PMT . You should see that it says END on the screen. Now,

ENTER to change that to BGN and finally press 2nd

CPT to exit from setting the calculation

mode. The screen will now show BGN in the upper-right corner. Note that nothing will change about how you enter
the numbers. The calculator will simply shift the cash flows for you. Obviously, you will get a different answer.
Let's do the college savings problem again, but this time assuming that you start investing immediately:
Suppose that you are planning to send your daughter to college in 18 years. Furthermore, assume that you have
determined that you will need $100,000 at that time in order to pay for tuition, room and board, party supplies, etc. If
you believe that you can earn an average annual rate of return of 8% per year, how much money would you need to
invest at the beginning of each year (starting today) to achieve your goal?

As before, enter the data: 18 into N , 8 into I/Y , and 100,000 into FV . The only thing that has changed is that
we are now treating this as an annuity due. So, once you have changed to Begin Mode, just press CPTPMT . You
will find that, if you make the first investment today, you only need to invest $2,472.42. That is about $200 per year
less than if you make the first payment a year from now because of the extra time for your investments to
compound.
Be sure to switch back to End Mode after solving the problem. Since you almost always want to be in End Mode, it
is a good idea to get in the habit of switching back. Press 2nd
screen. Now, press 2nd

PMT . You should see that it says BGN on the

ENTER to change that to END and finally press 2nd

CPT to exit from setting the

calculation mode. When in End Mode, the upper-right corner of the screen will be blank.
Example 2.6 Perpetuities
Occasionally, we have to deal with annuities that pay forever (at least theoretically) instead of for a finite period of
time. This type of cash flow is known as a perpetuity (perpetual annuity, sometimes called an infinite annuity). The
problem is that the BAII Plus has no way to specify an infinite number of periods using the N key.
Calculating the present value of a perpetuity using a formula is easy enough: Just divide the payment per period by
the interest rate per period. In our example, the payment is $1,000 per year and the interest rate is 9% annually.
Therefore, if that was a perpetuity, the present value would be:
$11,111.11 = 1,000 0.09
If you can't remember that formula, you can "trick" the calculator into getting the correct answer. The trick
involves the fact that the present value of a cash flow far enough into the future (way into the future) is going to be
approximately $0. Therefore, beyond some future point in time the cash flows no longer add anything to the
present value. So, if we specify a suitably large number of payments, we can get a very close approximation (in the
limit it will be exact) to a perpetuity.
Let's try this with our perpetuity. Enter 500 into N (that will always be a large enough number of periods), 9
into I/Y , and 1000 into PMT . Now press CPT

PV and you will get $11,111.11 as your answer.

Please note that there is no such thing as the future value of a perpetuity because the cash flows never end (period
infinity never arrives).
Please continue on to part III of this tutorial to learn about uneven cash flow streams, net present value, internal
rate of return, and modified internal rate of return.

Part III
In the previous section we looked at the basic time value of money keys and how to use them to calculate present
and future value of annuities. In this section we will take a look at how to use the BAII Plus to calculate the present
and future values of uneven cash flow streams. We will also see how to calculate net present value (NPV), internal
rate of return (IRR), and the modified internal rate of return (MIRR).
Example 3 Present Value of Uneven Cash Flows
In addition to the previously mentioned financial keys, the BAII Plus also has the CF (cash flow) key to handle a
series of uneven cash flows. To exit from "cash flow mode" at any time, simple press 2ndCPT (quit).
Suppose that you are offered an investment which will pay the following cash flows at the end of each of the next five
years:
Period

Cash Flow

100

200

300

400

500

How much would you be willing to pay for this investment if your required rate of return is 12% per year?
We could solve this problem by finding the present value of each of these cash flows individually and then
summing the results (the principle of value additivity). However, that is the hard way. Instead, we'll use
the CF key. All we need to do is enter the cash flows exactly as shown in the table. Again, we must clear the cash
flow registers first. In this case we need to press 2nd

CE/C (note that pressing 2nd

FV will have no effect

on the cash flow registers). The calculator will prompt you to enter each cash flow and then the frequency with
which it occurs. For now, just accept the default frequency of 1 each time. Now, press CF then 0 Enter down
arrow, 100 Enter down arrow (twice), 200 Enter down arrow (twice), 300 Enter down arrow (twice),
400 Enter down arrow (twice), and finally 500 Enter down arrow (twice). Now, press the NPV key and
enter 12 Enter down arrow when prompted for the interest rate. To get the present value of the cash flows,
press the down arrow key and then CPT . We find that the present value is $1,000.17922. Note that you can
easily change the interest rate by pressing the up arrow key to get back to that step.
Example 3.1 Future Value of Uneven Cash Flows
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Now suppose that we wanted to find the future value of these cash flows instead of the present value. There is no
key to do this so we need to use a little ingenuity. Realize that one way to find the future value of any set of cash
flows is to first find the present value. Next, find the future value of that present value and you have your
solution. In this case, we've already determined that the present value is $1,000.17922. Clear the financial keys
( 2nd

FV ) then enter -1000.17922 into the PV key. N is 5 and I/Y is 12. Now press CPT FV and you'll

see that the future value is $1,762.65753. Pretty easy, huh? (Ok, at least its easier than adding up the future values
of each of the individual cash flows.)
Note: At any time, you can return to cash flow mode by pressing CF . This will allow you to scroll through the cash
flows that you entered by using the arrow keys. You can change any of these cash flows. However, if you are
starting a completely new problem you should always press 2nd

CE/C to be sure that the cash flows from any

previous problem are cleared. Otherwise, you will very likely get a wrong answer.
Example 4 Net Present Value (NPV)
Calculating the net present value (NPV) and/or internal rate of return (IRR) is virtually identical to finding the
present value of an uneven cash flow stream as we did in Example 3.
Suppose that you were offered the investment in Example 3 at a cost of $800. What is the NPV? IRR?
To solve this problem we must not only tell the calculator about the annual cash flows, but also the cost
(previously, we set the cost to 0 because we just wanted the present value of the cash flows). Generally speaking,
you'll pay for an investment before you can receive its benefits so the cost (initial outlay) is said to occur at time
period 0 (i.e., today).
Since we have already entered all of the cash flows, we only need to change the initial outlay. Press CF to get back
into cash flow mode, and then input -800 Enter for CF0. Now, press NPV . Note that we need to supply a
discount rate so the calculator will now prompt you for it. Input 12 for I when prompted, and then Enter down
arrow and CPT . You'll find that the NPV is $200.17922.
Example 4.1 Internal Rate of Return
Solving for the IRR is done exactly the same way, except that the discount rate is not necessary. This time, you'll
press IRR and then CPT , and you'll find that the IRR is 19.5382%.
Example 4.2 Modified Internal Rate of Return
The IRR has been a popular metric for evaluating investments for many years primarily due to the simplicity
with which it can be interpreted. However, the IRR suffers from a couple of serious flaws. The most important flaw
is that it implicitly assumes that the cash flows will be reinvested for the life of the project at a rate that equals the
IRR. A good project may have an IRR that is considerably greater than any reasonable reinvestment assumption.
Therefore, the IRR can be misleadingly high at times.
The modified internal rate of return (MIRR) solves this problem by using an explicit reinvestment rate.
Unfortunately, financial calculators don't have an MIRR key like they have an IRR key. That means that we have to
use a little ingenuity to calculate the MIRR. Fortunately, it isn't difficult. Here are the steps in the algorithm that we
will use:

1. Calculate the total present value of each of the cash flows, starting from period 1 (leave out the initial outlay).
Use the calculator's NPV function just like we did in Example 3, above. Use the reinvestment rate as your
discount rate to find the present value.
2. Calculate the future value as of the end of the project life of the present value from step 1. The interest rate
that you will use to find the future value is the reinvestment rate.
3. Finally, find the discount rate that equates the initial cost of the investment with the future value of the cash
flows. This discount rate is the MIRR, and it can be interpreted as the compound average annual rate of return
that you will earn on an investment if you reinvest the cash flows at the reinvestment rate.
Suppose that you were offered the investment in Example 3 at a cost of $800. What is the MIRR if the reinvestment
rate is 10% per year?
Let's go through our algorithm step-by-step:
1. The present value of the cash flows can be found as in Example 3. Clear the TVM keys and then enter the cash
flows (remember that we are ignoring the cost of the investment at this point): press 2ndCE/C to clear the
cash flow keys. Now, press CF then 0 Enter down arrow, 100 Enter down arrow (twice),
200 Enter down arrow (twice), 300 Enter down arrow (twice), 400 Enter down arrow (twice), and
finally 500 Enter down arrow (twice). Now, press the NPV key and enter 10 Enter down arrow when
prompted for the interest rate. To get the present value of the cash flows, press the down arrow key and
then CPT . We find that the present value is $1,065.26.
2. To find the future value of the cash flows, enter -1,065.26 into PV , 5 into N , and 10 into I/Y . Now
press CPT

FV and see that the future value is $1,715.61.

3. At this point our problem has been transformed into an $800 investment with a lump sum cash flow of
$1,715.61 at period 5. The MIRR is the discount rate (I/Y) that equates these two numbers. Enter -800
into PV and then press CPT

I/Y . The MIRR is 16.48% per year.

So, we have determined that our project is acceptable at a cost of $800. It has a positive NPV, the IRR is greater
than our 12% required return, and the MIRR is also greater than our 12% required return.
Please continue on to the next page to learn how to solve problems involving non-annual periods.

Microsoft Excel as a Financial Calculator Part I

Excel (and other spreadsheet programs) is the greatest financial calculator ever made. There is more of a learning
curve than a regular financial calculator, but it is much more powerful. This tutorial will demonstrate how to use
Excel's financial functions to handle basic time value of money problems using the same examples as in the
calculator tutorials. I will keep the examples rather elementary, but if you already understand the basics of using
Excel, this tutorial will help you to understand the financial functions.
An Excel spreadsheet can be downloaded that contains each of the examples shown in this tutorial.
For more advanced Excel functionality, please see my Excel pagesand/or my Excel Blog. If you have any questions
or comments, please feel free to contact me.
Analogy to Calculator Financial Keys
All financial calculators have five financial keys, and Excel's basic time value functions are exactly analogous. The
table below shows the equivalency between the calculator keys and Excel functions:
Purpose

CalculatorKey

Excel Function

Solve for
Number of
Periods

NPer(rate, pmt, pv, fv, type)

Solve for
periodic
interest rate

I/Yr

Rate(nper,pmt,pv,fv,type,guess)

Solve for
present value

PV

PV(rate,nper,pmt,fv,type)

Solve for
annuity
payment

PMT

PMT(rate,nper,pv,fv,type)

Solve for
future value

FV

FV(rate,nper,pmt,pv,type)

Just as you have to supply at least three of the variables to solve a TVM problem in a financial calculator, you also
have to supply at least three of the arguments to each Excel function. Note that in the table, the bold function
arguments are required while those in italics are optional.
You don't need to memorize the order of the function arguments. You can use the Insert Function dialog box, which
will prompt your for the arguments by name. Or, if you prefer to type the function directly, Excel will display a
Smart Tag that shows the order of the arguments as you type.
Example 1 - Future Value of Lump Sums
We'll begin with a very simple problem that will provide you with most of the skills to perform financial math
using Microsoft Excel:
10

Suppose that you have $100 to invest for a period of 5 years at an interest rate of 10% per year. How much will you
have accumulated at the end of this time period?
In this problem, the $100 is the present value (PV), NPer is 5, and Rate is 10%. Open a new workbook and enter the
data as shown below, but leave B5 blank for now.

To find the future value of this lump sum investment we will use the FV function, which is defined as:
FV(rate,nper,pmt,pv,type)
Select cell B5 and then type: =FV(B3,B2,0,-B1) and then press Enter. The answer that you get should be 161.05.
A Couple of Notes
1. Every time value of money problem has either 4 or 5 variables (corresponding to the 5 basic financial
variables). Of these, you will always be given 3 or 4 and asked to solve for the other. In this case, we have a 4variable problem and were given 3 of them (Nper, Rate, and PV) and had to solve for the 4th (FV). Be sure that
any variables not in the problem are set to 0, otherwise they will be included in the calculation. In this case,
we did not have an annuity payment (PMT), so the third argument in the FV function was set to 0.
2. Note that we left out the optional Type argument. In all of these functions, the Type argument tells Excel when
the first cash flow occurs (0 if at the end of the period, 1 if at the beginning). This argument is identical to
setting your financial calculator to End Mode or Begin Mode, and only affects the answer when there is an
annuity payment. When solving lump sum problems such as this, the argument has no effect. If you had typed
=FV(B3,B2,0,-B1,1) you would have gotten the same answer.
3. Note that, unlike most financial calculators, there is no argument to set the compounding frequency. This is
actually a good thing, in my opinion, because those settings on financial calculators cause all kinds of trouble
when people forget to set them correctly. In Excel functions, you must set NPer to be the total number of
periods, Rate to be the interest rate per period, and PMT to be the annuity payment per period. So, if this
problem had said that the compounding was monthly (annual was implied), then we would have typed
=FV(B3/12,B2*12,0,-B1).
4. Note that our interest rate (in B3) was entered into that cell as 0.10 (or, you could type 10%). This is different
than financial calculators. In a calculator, your interest rate would be entered as 10 instead of 0.10. The
calculator automatically divides the number entered into the interest rate by 100. Excel makes no adjustment
to Rate, so you must enter it as a decimal. Had you entered 10 (without the percent sign) into B3, the future
value would have come out to $16,105,100 obviously incorrect. That's because Excel would think that your
interest rate was 1,000% per year.
5. Notice that we entered -B1 (-100) for the PV argument in the function. Most financial calculators (and
spreadsheets) follow the Cash Flow Sign Convention. This is simply a way of keeping the direction of the cash
flow straight. Cash inflows are entered as positive numbers and cash outflows are entered as negative
11

numbers. In this problem, the $100 was an investment (i.e., a cash outflow) and the future value of $161.05
would be a cash inflow in five years. Had you entered the $100 as a positive number no harm would have
been done, but the answer would have been returned as a negative number. This would be correct had you
borrowed $100 today (cash inflow) and agreed to repay $161.05 (cash outflow) in five years.
6. We can change any of the variables in this problem without needing to re-enter all of the data. For example,
suppose that we wanted to find out the future value if we left the money invested for 10 years instead of 5.
Simply change B2 to 10, and you'll find that the answer in B5 is 259.37.
7. Please note that it is important that you always use cell references in your formulas. Never type a number
directly into any formulas or Excel functions (unless that number will never change). If you do type numbers
into formulas, then you will have to remember to change each formula that relies on that number or else you
will get errors. The best practice is to always have an "input area" somewhere on your worksheet that
contains all of the variables. Then, each formula or function that you use will get its values by referencing cells
in the input area. (Note that I broke this rule in #3, above. That was for ease of explanation. I should have
added a row with the label "Compounding" and put the 12 in there instead.)
Example 1.1 Present Value of Lump Sums
Solving for the present value of a lump sum is nearly identical to solving for the future value, except that we use the
PV function. One important thing to remember is that the present value will always (unless the interest rate is
negative) be less than the future value. Keep that in mind because it can help you to spot incorrect answers due to a
wrong input. Let's try a new problem:
Suppose that you are planning to send your daughter to college in 18 years. Furthermore, assume that you have
determined that you will need $100,000 at that time in order to pay for tuition, room and board, party supplies, etc. If
you believe that you can earn an average annual rate of return of 8% per year, how much money would you need to
invest today as a lump sum to achieve your goal?
In this case, we already know the future value ($100,000), the number of periods (18 years), and the per period
interest rate (8% per year). We want to find the present value. Create a worksheet like the one below:

We need to use the PV function, which is defined as:

PV(rate,nper,pmt,fv,type)
So, select B5 and enter the formula: =PV(B3,B2,0,-B1) and see that you would need to invest $25,025 today to fund
your daughter's future education. That is a lot of money to invest all at once, but we'll see on thenext page that you
can lessen the pain by investing smaller amounts each year. Alternatively, if you are willing to take on considerably
more risk then you might be able to earn, say, 11% per year. If you change the value in B3 to 11%, then you can see
that you would only have to invest $15,282.22.
Example 1.2 Solving for the Number of Periods

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Sometimes you know how much money you have now, and how much you need to have at an undetermined future
time period. If you know the interest rate, then you can solve for the amount of time that it will take for the present
value to grow to the future value by solving for N.
Suppose that you have $1,250 today and you would like to know how long it will take you double your money to
$2,500. Assume that you can earn 9% per year on your investment.
This is the classic type of problem that we can quickly approximate using the Rule of 72. However, we can easily
find the exact answer using the NPer function. As the name suggests, this function is designed to solve for the
number of periods and is defined as:
NPer(rate, pmt, pv, fv, type)
Create a new worksheet and enter the data shown below:

Select B5 and type: =NPER(B3,0,-B1,B2). You can see that it will take 8.04 years to double your money. One
important thing to note is that you absolutely must enter your according to the cash flow sign convention. If you
don't make either the PV or FV a negative number (and the other one positive), then you will get a #NUM error
instead of the answer. That is because, if both numbers are positive, Excel thinks that you are getting a benefit
without making any investment. If you get this error, just fix the problem by changing the sign of either PV or FV. In
this problem it doesn't really matter which one is negative. The key is that they must have opposite signs.
Note that in this problem we wanted to know how long it will take to double your money at 9%. The exact numbers
for the PV and FV don't matter as long as the FV is exactly twice the PV. You can prove this by changing the PV to 1
and the FV to 2. You will get exactly the same answer.
Example 1.3 Solving for the Interest Rate
Solving for the interest rate is quite common. Maybe you have recently sold an investment and would like to know
what your compound average annual rate of return was. Or, perhaps you are thinking of making an investment and
you would like to know what rate of return you need to earn to reach a certain future value. Let's return to our
college savings problem from above, but we'll change it slightly.
Suppose that you are planning to send your daughter to college in 18 years. Furthermore, assume that you have
determined that you will need $100,000 at that time in order to pay for tuition, room and board, party supplies, etc. If
you have $20,000 to invest today, what compound average annual rate of return do you need to earn in order to reach
your goal?
Finding the interest rate in a time value of money problem requires the use of the Rate function, which is defined
as:
Rate(nper,pmt,pv,fv,type,guess)
Note that the Guess argument is rarely required and is optional. In most cases, you can just leave it out. It is
included for those times (only when dealing with annuities) when there are two or more solutions to the problem.
13

Typically, this only happens when you are dealing with uneven cash flows and there are sign changes in the cash
flow stream. It can occasionally happen in annuity problems, when the FV has a different sign than PMT.

Create a new worksheet and enter the data as shown above. Select B5 and enter the Rate function: =RATE(B3,0,B1,B2). As before, we need to be careful when entering the PV and FV into the function. In this case, you are going
to invest $20,000 today (a cash outflow) and receive $100,000 in 18 years (a cash inflow). Therefore, we entered 20,000 for PV, and 100,000 into FV. Again, if you get #NUM instead of an answer, it is because you didn't follow the
cash flow sign convention.
Note that in our original problem we assumed that you would earn 8% per year, and found that you would need to
invest about $25,000 to achieve your goal. In this case, though, we assumed that you started with only $20,000.
Therefore, in order to reach the same goal, you would need to earn a higher interest rate.
When you have solved a problem, always be sure to give the answer a second look and be sure that it seems likely
to be correct. This requires that you understand the calculations that the functions are doingand the relationships
between the variables. If you don't, you will quickly learn that if you enter wrong numbers you will get wrong
answers. Remember, Excel only knows what you tell it, it doesn't know what you really meant.
Please continue on to part II of this tutorial to learn about using Microsoft Excel to solve problems involving
annuities and perpetuities.

Please note that there are many other spreadsheet programs available. While I haven't used them all (at least
lately), the functions used in this tutorial should work with all of them. If you don't need some of the advanced
functionality that Excel offers, you might try the following free (or low-cost) alternatives:
Open Office Suite A cross-platform and free office suite that seeks to fully compete with Microsoft Office.
This is a particularly good choice for Linux users.
Google Docs & Spreadsheets A free online-only word processor and spreadsheet.
ThinkFree Office A low-cost alternative to Microsoft Office.
And Many Others

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Part II
In the previous section we looked at the basic time value of money functions and how to use them to calculate
present and future value of lump sums. In this section we will take a look at how to use Excel to calculate the
present and future values of regular annuities and annuities due.
A regular annuity is a series of equal cash flows occurring at equally spaced time periods. In a regular annuity,
the first cash flow occurs at the end of the first period. When using the TVM functions with regular annuities,
either omit the Type argument or set it to 0.
An annuity due is similar to a regular annuity, except that the first cash flow occurs immediately (at period 0).
When using the TVM functions with annuities due, you must use the Type argument and it should be set to 1.
Example 2 Present Value of Annuities
Suppose that you are offered an investment that will pay you $1,000 per year for 10 years. If you can earn a rate of
9% per year on similar investments, how much should you be willing to pay for this annuity?
In this case we need to solve for the present value of this annuity since that is the amount that you would be
willing to pay today.

Recreate the spreadsheet pictured above, but leave B5 empty for now. To calculate the present value of an
annuity (or lump sum) we will use the PV function. Select B5 and type: =PV(B3,B2,B1). The answer is -6,417.66.
Again, this is negative because it represents the amount you would have to pay (cash outflow) today to
purchase this annuity.
Usually, I would like this to show as a positive number (even though it represents an outflow), so I would put a
negative sign in front of the function. It would then look like: =-PV(B3,B2,B1) and would give the same answer,
except that it would be a positive number. Note that I entered the annuity payment reference (B1) as a positive
number because the problem specifically said that you would be receiving this amount each year (a cash
inflow).
Example 2.1 Future Value of Annuities
Now, suppose that you will be borrowing $1000 each year for 10 years at a rate of 9%, and then paying back the
loan immediate after receiving the last payment. How much would you have to repay?
In this case, we want to find the future value of the annuity. In your worksheet, change the label in A5 to Future
Value and then in B5 enter: =FV(B3,B2,B1).

15

Note that the order of the arguments in both the PV and FV functions are identical, so you could have just
changed the PV to FV. The answer is -15,192.93 (a cash outflow). This means that after 10 years of borrowing
$1,000 per year, you would have to repay $15,192.93 to satisfy the loan terms. Again, if you would prefer this
to show as a positive number, you could change the sign of the annuity payment or put a negative sign in front
of the function (i.e., =-FV(B3,B2,B1)).
Example 2.2 Solving for the Payment Amount
We often need to solve for annuity payments. For example, you might want to know how much a mortgage or
auto loan payment will be. Or, maybe you want to know how much you will need to save each year in order to
reach a particular goal (saving for college or retirement perhaps). On the previous page, we looked at an
example about saving for college. Let's look at that problem again, but this time we'll treat it as an annuity
problem instead of a lump sum:
Suppose that you are planning to send your daughter to college in 18 years. Furthermore, assume that you have
determined that you will need $100,000 at that time in order to pay for tuition, room and board, party supplies,
etc. If you believe that you can earn an average annual rate of return of 8% per year, how much money would you
need to invest at the end of each year to achieve your goal?
Recall that we previously determined that if you were to make a lump sum investment today, you would have
to invest $25,024.90. That is quite a chunk of change. In this case, saving for college will be easier because we
are going to spread the investment over 18 years, rather than all at once. (Note that, for now, we are assuming
that the first investment will be made one year from now. In other words, it is a regular annuity.)
Open a new worksheet and enter the data as shown below:

In this problem we want to solve for an annual annuity payment, so we will use the PMT function. Select B5 and
enter: =PMT(B3,B2,0,B1). Note that we entered 0 for the PV argument because the problem doesn't specify an
initial investment. You will find that you need to invest $2,670.21 per year for the next 18 years to meet your
goal of having $100,000.
Now, let's change the problem slightly by including a lump sum investment made today:
Suppose that you have just received a gift from one of your daughter's grandparents. They have given you $5,000
to be invested to help pay for her college tuition. How does this change the amount that you would have to invest
each year?
Since you will now be investing $5,000 today (the PV), the amount that you need to save in future years will be
reduced. To find out the new annual payment that is required, we need to modify the spreadsheet somewhat.
First, select Row 1 and insert a new row. Now, in A1 type: Present Value and in B1 enter: 5,000.

16

Finally, we need to change the formula in B6 to: =PMT(B4,B3,-B1,B2). Notice that the PV argument has been
changed from 0 to -B1. It has to be entered as a negative number because the $5,000 will be invested (a cash
outflow). If you had put it in as a positive number, then you would get the wrong answer ($3,203.72). You
should catch this error because the result is higher than if you didn't have the $5,000 to invest. Again, you
always have to think about the direction of the cash flows when using these functions.
Example 2.3 Solving for the Number of Periods
Solving for N answers the question, "How long will it take..." Let's look at an example:
Imagine that you have just retired, and that you have a nest egg of $1,000,000. This is the amount that you will be
drawing down for the rest of your life. If you expect to earn 6% per year on average and withdraw $70,000 per
year, how long will it take to burn through your nest egg (in other words, for how long can you afford to live)?
Assume that your first withdrawal will occur one year from today.
In this problem, we know the present value ($1,000,000), the annual payment ($70,000), and the interest rate
(6%). We want to know how long the money that you have now will last. In other words, we want to solve for
the number of periods. Set up a worksheet to look like the one below:

Select B5 and enter: =NPER(B3,B2,-B1). You will see that you can make 33.40 withdrawals. Assuming that you
can live for about a year on the last withdrawal, then you can afford to live for about another 34.40 years.
Now, let's change the problem slightly:
Suppose that you would like to leave an inheritance of at least $100,000 to your favorite charity. How does this
affect the number of periods in which you can withdraw the $70,000 per year?
It should be obvious that the answer will be less than before because you aren't going to withdraw the entire
$1,000,000. However, be aware that this is not the same as investing only $900,000 today because the
$100,000 is a future value. Modify your worksheet so that it looks like the one below:

17

The formula in B6 needs to be changed to: =NPER(B4,B3,-B1,B2). Note that the future value argument (B2)
should be entered as a positive number. In this case, saving $100,000 to give as an inheritance will reduce the
amount of time that you can draw on your savings to 31.86 years.
Example 2.4 Solving for the Interest Rate
Solving for the interest rate works just like solving for any of the other variables. As has been mentioned
numerous times in this tutorial, be sure to pay attention to the signs of the numbers (or cell references) that
you enter into the TVM functions. Any time you are solving for NPer, Rate, or PMT there is the potential for a
wrong answer or error message if you don't get the signs right. Let's look at an example of solving for the
interest rate:
Suppose that you are offered an investment that will cost $925 and will pay you interest of $80 per year for the
next 20 years. Furthermore, at the end of the 20 years, the investment will pay $1,000. If you purchase this
investment, what is your compound average annual rate of return?
Note that in this problem we have a present value ($925), a future value ($1,000), and an annuity payment
($80 per year). As mentioned above, you need to be especially careful to get the signs right. In this case, both
the annuity payment and the future value will be cash inflows, so they should be entered as positive numbers.
The present value is the cost of the investment, a cash outflow, so it should be entered as a negative number. If
you were to make a mistake and, say, enter the payment as a negative number, then you will get the wrong
answer. On the other hand, if you were to enter all three with the same sign, then you will get an error message.

Create a new worksheet like the one above. In B6 enter the formula: =RATE(B4,B3,-B1,B2). You will find that
the investment will return an average of 8.81% per year. Again, notice that the PV (the amount that you will
pay) is entered as a negative number while the PMT and FV are positive numbers because they represent cash
inflows. This particular problem is an example of solving for the yield to maturity (YTM) of a bond.
Example 2.5 Annuities Due
In the examples above, we assumed that the first payment would be made at the end of the year, which is
typical. However, what if you plan to make (or receive) the first payment today? This changes the cash flow
from from a regular annuity into an annuity due. Note that this only changes the timing of the cash flows; the
functions and formulas that are used are the same.
18

By default, the time value of money functions assume that the cash flows occur at the end of the period. In this
case, though, the payments occur at the beginning of the period. Therefore, we will need to use the Type
argument in the functions, and make sure that it is set to 1. Note that nothing will change about how you enter
the numbers. The functions will simply shift the cash flows for you. Obviously, you will get a different answer
because the timing is different.
Let's do the college savings problem again, but this time assuming that you start investing immediately:
Suppose that you are planning to send your daughter to college in 18 years. Furthermore, assume that you have
determined that you will need $100,000 at that time in order to pay for tuition, room and board, party supplies,
etc. If you believe that you can earn an average annual rate of return of 8% per year, how much money would you
need to invest at the beginning of each year (starting today) to achieve your goal?
This problem is identical to the one that we did earlier, but we are now treating this as an annuity due. So, you
can use the same spreadsheet to solve the problem with only minor changes:

I have added a row for the Type argument, and set it (in B4) to 1. This isn't strictly necessary, but it will be
helpful in a moment. In B6, enter the formula: =PMT(B3,B2,0,B1,B4). Previously, we left out the Type argument
because Excel automatically sets it to 0 (end of period) if it is omitted. In this case, we had to include the
argument.
You will find that, if you make the first investment today, you only need to invest $2,472.42. That is about $200
per year less than if you make the first payment a year from now because of the extra time for your
investments to compound. Since we entered the Type argument in B4, you can change it to 0 and you will see
that waiting until the end of the year to make the first investment means that you would have to invest
$2,670.21 per year. The sooner you start investing, the less you have to invest to meet a goal.
Example 2.6 Perpetuities
Occasionally, we have to deal with annuities that pay forever (at least theoretically) instead of for a finite
period of time. This type of cash flow is known as a perpetuity (perpetual annuity, sometimes called an infinite
annuity). The problem is that there is no way to specify an infinite number of periods for the NPer argument.
Calculating the present value of a perpetuity using a formula is easy enough: Just divide the payment per period
by the interest rate per period. As an example, assume that the payment is $1,000 per year and the interest rate
is 9% annually. Therefore, if that was a perpetuity, the present value would be:
$11,111.11 = 1,000 0.09
Create a worksheet that looks like the one below:

19

If you can't remember the formula, you can "trick" the PV function into getting the correct answer. The trick
involves the fact that the present value of a cash flow far enough into the future (way into the future) is going to
be approximately $0. Therefore, beyond some future point in time the cash flows no longer add anything to the
present value. So, if we specify a suitably large number of payments, we can get a very close approximation (in
the limit it will be exact) to a perpetuity.
Let's try this with our perpetuity. Select row 3 and insert a new row. In A3 enter: Number of Years, and enter
500 into B3 (that will always be a large enough number of periods). You will get $11,111.11 as your answer.

Please note that there is no such thing as the future value of a perpetuity because the cash flows never end
(period infinity never arrives). However, in the example spreadsheet Excel will calculate the future value as of
period 500 (or whatever you enter into B3) because that is technically not an infinite amount of time in the
future.
Please continue on to part III of this tutorial to learn about uneven cash flow streams, net present value,
internal rate of return, and modified internal rate of return.

20

Part III
In the previous section we looked at using the basic time value of money functions to calculate present and future
value of annuities (even cash flows). In this section we will take a look at how to use Excel to calculate the present
and future values of uneven cash flow streams. We will also see how to calculate net present value (NPV), internal
rate of return (IRR), and the modified internal rate of return (MIRR).
Example 3 Present Value of Uneven Cash Flows
This is where Excel really shines in comparison to financial calculators. For all intents and purposes there are no
limits on the number of cash flows that you can have in your functions. Financial calculators do have a limit on the
number of uneven cash flows. Furthermore, Excel makes it very easy to change your cash flows to answer "What
if?" questions, or if you made a data entry error.
To find the present value of an uneven stream of cash flows, we need to use the NPV (net present value) function.
This function is defined as:
NPV(Rate,Cash Flow 1,Cash Flow 2,Cash Flow 3, ...)
Note that we don't generally list each cash flow separately. Typically, the cash flows will be in a contiguous range
on the worksheet and we simply give the address of the range for Cash Flow 1.
Suppose that you are offered an investment that will pay the following cash flows at the end of each of the next five
years:
Period
Cash Flow
0

100

200

300

400

500

How much would you be willing to pay for this investment if your required rate of return is 12% per year?
We could solve this problem by finding the present value of each of these cash flows individually and then
summing the results. However, that is the hard way. Instead, we'll use the NPV function. Set up a worksheet as
shown below:

Now, select B11 and type: =NPV(B1,B5:B9) and you will see that the answer is $1,000.18. Make a special note of
the fact that we did not include the period 0 cash flow in the function. The NPV function has no way of knowing
21

when a cash flow occurs, so it assumes that the first cash flow in the range occurs one period in the future. If we
had included a period 0 cash flow, then the function would have given us the present value as of one period ago
(i.e., period -1). Please see my blog post for more on this topic.
As before, you can now change any of the numbers in the worksheet and immediately see the result. For example, if
you change B1 to 10% you will find that the answer is now $1,065.26. If you change B9 to 1,000 then the present
value (still at a 10% interest rate) will change to $1,375.72. Reset the interest rate to 12% and B9 to 500 before
continuing.
Example 3.1 Future Value of Uneven Cash Flows
Now suppose that we wanted to find the future value of these cash flows instead of the present value. There is no
function to do this so we need to use the principal of value additivity. That means that we find the future value of
each of the cash flows, individually, and then add them all together.

In the picture above, you can see that the future value (at period 5) of the $100 cash flow in year 1 is $157.35 (C5).
That cash flow needs to be taken four periods forward (moved from period 1 to 5) so the formula in C5 is:
=FV($B$1,$A$9-A5,0,-B5). Notice that I calculated NPer by taking the period of the last cash flow (5, in A9) minus
the period of the current cash flow (1, in A5). Also, note that the dollar signs in the cell addresses serve to freeze
the reference so that when I copy the formula down those addresses won't change (i.e., they are absolute
references). Copy and then paste that formula into A6:A9 and your spreadsheet should look like the one in the
picture. Now, to find the future value of the cash flows in B11, use the formula: =SUM(C5:C9). The future value is
$1,762.66.
That's not too difficult, but I find it a little sloppy to use a helper column when it isn't absolutely necessary. There is
another way, as seen in the picture below (note that I have eliminated the calculations in column C).

Realize that one way to find the future value of any set of cash flows is to first find the present value of those cash
flows. Next, find the future value of that present value and you have your solution. The picture, below,
demonstrates the process:

22

We've already seen that we can calculate the present value of these cash flows using the NPV function, so we'll just
plug the NPV function in for the PV argument in the FV function. The formula becomes: =FV(B1,A9,0,NPV(B1,B5:B9)) and the answer is the same as before, $1,762.66.
Pretty easy, huh? Ok, at least its easier and neater than adding up the future values of each of the individual cash
flows. It is also less confusing to anybody who looks at your spreadsheet.
Example 4 Net Present Value (NPV)
Calculating the net present value (NPV) and/or internal rate of return (IRR) is virtually identical to finding the
present value of an uneven cash flow stream as we did in Example 3. However, be aware that Excel's NPV function
doesn't really calculate net present value. Instead, it simply calculates the plain old present value of uneven cash
flows. It does not, and this is vitally important, take the cost of the investment into account. (See my blog post on
this topic.) We'll see how to deal with this in the example below.
Suppose that you were offered the investment in Example 3 at a cost of $800. What is the NPV? IRR? MIRR?
Make a copy of your previous worksheet and paste it into a new worksheet, so that it looks like the one below.

Recall that the NPV, according to the actual definition, is calculated as the present value of the expected future cash
flows less the cost of the investment. As we've seen, we can use the NPV function to calculate the present value of
the uneven cash flows in this example. Then, we need to subtract the $800 cost of the investment. Therefore, the
formula to calculate the net present value is: =NPV(B1,B5:B9)+B4 and the answer is $200.18. Note that since the
cost of the investment is given as a negative number in B4 (it is a cash outflow), I had to ADD it to the result of the
NPV function. In other words, the PV of the cash flows is $1,000.18 as we calculated in example 3, and subtracting
$800 leaves us with $200.18 (the net present value).
Example 4.1 Internal Rate of Return
Solving for the IRR is easier, because the IRR function does take the initial outlay into account automatically. This
IRR function is defined as:
IRR(values,guess)
Note that the "values" is a contiguous range of cash flows, including the initial outlay. The "guess" argument is
optional and generally isn't needed. For this problem, the function in B12 is: =IRR(B4:B9).
23

As seen above, the answer is 19.54%. This means that if you purchase the investment for $800 today, your
compound average annual rate of return will be 19.54% per year.
Example 4.2 Modified Internal Rate of Return
As noted in the definition of IRR, the IRR calculation implicitly assumes that you will reinvest the cash flows at the
same rate as the IRR. Often, this assumption is unrealistic and can lead to expectations about the rate of return that
are too high. That is why it is better to calculate the Modified Internal Rate of Return(MIRR), which allows you to
specify an alternative reinvestment rate.
The MIRR function is defined almost identically to the IRR function, except that it has a reinvestment rate
argument (and there is never a need for a "guess"):
MIRR(values,finance_rate,reinvest_rate)
In this function "values" is a contiguous range of cash flows (including the initial outlay), finance_rate is your
required rate of return (i.e., the discount rate), and reinvest_rate is the reinvestment rate. Excel will use the
finance_rate to calculate the present value of all of the cash outflows, and the reinvest_rate to calculate the future
value of all of the cash inflows. The MIRR is the interest rate that makes the present value of the outflows grow to
the future value of the inflows over the life of the investment.
Theoretically, the reinvestment rate should usually be the same as the cost of capital, so we usually set both the
finance_rate and reinvest_rate to the same interest rate. To calculate the MIRR in B13, use the formula:
=MIRR(B4:B9,B1,B1).

As you can see, the MIRR is 17.12%. This means that if you pay $800 for the investment and reinvest the cash flows
at a rate of 12% per year, you compound average annual rate of return will be 17.12% per year.
As a final note, realize that this investment should be accepted because its NPV is greater than 0, its IRR is greater
than the 12% cost of capital, and its MIRR is also greater than its cost of capital.
I hope that you have found this tutorial to be helpful. If you have any questions or comments, please feel free
to contact me.
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