Date: 12 October 2001
Subject: Investment Appraisal

Does anyone know where I could get a spreadsheet (with examples) outlining the basics of investment appraisal that covers:

Cash flow
Time value of money
NPV, IRR, PI etc
What is difference if pay in arrears vs. pay in advance
Running discount payback
Straight payback
What if's on above
Tax impacts

Looking for something I can adapt without having to recreate the wheel or creating a monster

Thanks in advance for your help

Rgds

Matthew Selbie

Subject: RE: Investment Appraisal

Thanks for this and I will give some more detail when I have looked at your web site. I looked at the NPER and have a question.

I thought that you could not divide the annual discount rate by 12 to get the monthly eg. if its 24% annual you are aiming for, the monthly is not 24/12 ie. 2% but its ((1+oldrate)^(1/factor))-1 where factor is scale period (in the case above its 12). This is because the months compound.

I am not an accountant but got this from an accounts person at work ??

Is this right /wrong ?

Grateful for your thoughts and will have a look at the web site soon

Thanks

Matthew Selbie

Date: 13 October 2001
Subject: Investment Appraisal

Good to hear from you Matthew.

Your point about interest rates really concerns NOMINAL and EFFECTIVE rates.

The 12% is the nominal rate: that is the rate that the bank, your company, the moneylender quotes as their interest rate. So you could see a sign in a bank saying Home Loans 2.5% annually. However, this is not the rate you really pay, that is the effective rate. However, how do we get from nominal to effective? How do you turn 2.5% nominal into x% effective? We do this:

((1 + r/m)^mn) - 1

where: r is the rate of interest as a decimal
n is the number of times per year you'd like to compound (12 = monthly compounding) and
n is the number of years you're interested in.

In this case, for monthly compounding for one year we have

((1 + 0.025/12)^(1*12)) - 1 = ((1 + 0.002083)^12 - 1 = 1.025288 - 1 = 0.025288

Converting this to a percentage gives us 0.025288 * 100 = 2.5288%

So 2.5% nominal compounded monthly for one year gives 2.5288% effective when compounded monthly for one year

As far as the above formula is concerned, m can be 1 for compounding only once per year, 2 for half yearly compounding, 12 for monthly compounding, 365 for daily compounding ...

For a much more comprehensive discussion of interest rates, compounding and discounting, I have a page for that too:

Hope that helps.

Best wishes

Duncan