When using XIRR to calculate the performance of a stock trading account, do you need to have a beginning cash flow equal to the starting balance of the account (seed money) ?
When I do that, it throws the formula completely for a loop and I either get errors because it can't calculate the return, or the return is very, very negative despite the account actually increasing in value over the year.
$7,000 starting balance/seed money, entered as a negative, January 1st
$6,800 invested in a trade, January 2nd
$8,000 deposited from closing the trade, December 22nd.
The ROIC on the trade would be 17.6%, and the MWRR should be about 17.1%, +/- 1% since the investment period was slightly less than a full year.
But XIRR is returning -43%?! If I tell XIRR to ignore the seed money, and only look at the amount invested in the trade and the amount received when closing the trade, I get just over 18%, which seems right.
What am I not understanding about XIRR? I thought all IRR needed to include the seed money?
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I am trying to use a circular reference with iterative calculations to find a specific number however my file will not display the number. I turn iterative calculations but it fluctuates wildly even though there is a definitive answer. I have included an image of my example.
In general, circular references are a result of an incorrect structure in formulas. Enabling iterative calculations is not a solution to this problem. They are only intended in situations where repeatedly performing a calculation will lead to stable result.
(An example of useful iterative calculations is field analysis. You can define values around the edge of a field of any shape. In the interior, the value of every point is the average of all the points around it. After several thousand iterations, everything will stabilise to an evenly distributed field.)
In your situation, iterative calculations does not lead to a stable result. When Ending Cash is -300, the Cash Deposit is set to 300. But then the Ending Cash is 0, so the Cash Deposit is set to 0. But then the End Cash is -300, so the Cash Deposit is set to 300, ad finitum.
The calculation of how much Cash Deposit is required to ensure the End Cash is greater than or equal to 0 can't be based on the End Cash or the Total Deposit, as it will keep contradicting itself as to whether or not a Cash Deposit is required.
Instead, the calculation of how much Cash Deposit is required must look at all other deposits excluding itself and compare that to the total withdrawls. (By not referring to the Total Deposits or End Cash, there is no circular reference). It can be set up as:
=IF(B2+B5<B14,B14-(B2+B5),0)
It adds together all other Deposits excluding itself and compares that to the Total Withdrawals to determine whether any additional deposit is required. If an additional deposit is required, it then subtracts all other Deposits from the Total Withdrawals to find out how much it needs to be.
A more elegant way of writing such a formula is:
=MAX(B14-B5-B2,0)
This simply subtracts all deposits from the total withdrawal, and returns the difference if it is needed when it is positive (more withdrawals), or returns 0 if it is not needed when the difference is negative (more deposits).
So for example: You want to receive $X in today's dollars at the beginning of each year for Z# of years. Assuming a 3% constant inflation rate and a 7% compounded annual rate of return.
I know the formula to calculate the inflation adjusted returns; for the rate of return you have to use this formula:
[[(1+investment return)/(1+inflation rate)]-1]*100 OR in this instance
[(1.07/1.03)-1]*100
then you need to use the Present Value formula to calculate the rest PV(rate,nper,pmt,[fv],[type]) to find out how much $ is needed to sustain $X adjusted for inflation for Z# years. So here's my formula that I'm using:
=PV((((((1+E16)/(1+B15))-1)*100)),H14,-O7,,1)
Where E16 is my Annual Return (7%), B15 is my Inflation Rate (3), H14 is the number of years I need the payment (30), -O7 is my payment amount (made negative to give a positive #)($127,621.98), future value [fv] is left blank as is unnecessary, and Type is 1 so I calculate for receiving the payment at the beginning of the year.
What all this "should" return is $2,325,327.2044 according to my financial calculator, however Excel is giving me $160,484.6347.
What am I doing wrong here?
The syntax for PV includes:
Rate Required. The interest rate per period. For example, if you obtain an automobile loan at a 10 percent annual interest rate and make monthly payments, your interest rate per month is 10%/12, or 0.83%. You would enter 10%/12, or 0.83%, or 0.0083, into the formula as the rate.
So don't factor by *100.
Many parentheses serve no purpose as the formula below is sufficient:
=PV((1+E16)/(1+B15)-1,H14,-O7,,1)
The Excel (2013) result to four DP is: $2,325,327.2045.
I am preparing a cashflow statement where I take a loan every month - all at the same interest rate and duration. Thus, I need to forecast EMI, interest, and principal for each month from all the loans taken so far.
In reality, I figured out PMT. I calculated PMT for $1 and multiplied that by the sum of all principals that are active (using OFFSET formula to determine whether a period is within loan duration). Something like...
=SUM(OFFSET(AMOUNT_HEADER, MAX(1, Curr_Period-(DURATION*12)+1), 0, MIN(Curr_Period, DURATION*12), 1))*-PMT(Interest/12,DURATION*12,1)
Now, while I was able to crack EMI, mainly because it is "equal" every month, I am unable to figure out how to split the principal and interest.
Can anyone suggest something that is accurate or an approximation of Principal and Interest each month?
Check out the Excel functions PPMT and IPMT which calculate the principle and interest, respectively, for any period over the duration of the loan. To get the sum of interest payments for any period you can use the ARRAY formula (CTRL-ENTER):
=SUM(IPMT(Interest/12,ROW(OFFSET(AMOUNT_HEADER,Curr_Period+1,0,1,1))-ROW(OFFSET(AMOUNT_HEADER,1,0,Curr_Period,1)),DURATION*12,-OFFSET(AMOUNT_HEADER,1,0,Curr_Period,1),0,0))
This formula assumes that their is a column of loan amounts with the column header AMOUNT_HEADER. The first loan is assumed to occur at Period=0. Curr_Period is assumed to be 1, 2, 3, ... The ROW(...)-ROW(...) portion of the formula is used to generate a series of ages for each loan, so if Curr_Period = 5, this part of the formula generates {5;4;3;2;1}. These ages are used as the per argument in IPMT.
Note: This formula doesn't guard against exceeding Curr_Period exceding the duration of any of the loans, but could be modified to do so. It could also be modified to sum up principle payments instead of interest
I had tried to run some example from my calculator on excel. I cannot get the correct answer of 203.13. Can someone try to pinpoint the error in my formula?
You plan to open a savings account and deposit the same amount of money at the beginning of each month. In 10 years, you want to have $25,000 in the account.
How much should you deposit if the annual interest rate is 0.5% with quarterly compounding?
FV 25000
NPER 10
RATE 0.50%
PMT ($193.23)
=PMT(RATE/4, NPER*12,,FV)
You must observe consistency in the periodicity. If you use monthly payments, you must have an NPER in months as well, and a monthly RATE. THe difficulty here is that the quarterly compound with a monthly deposit.
If you calculate everything on a quarterly basis, you will also have dfferences, but I think they will be minor.
To calculate a precise answer you would need to know when you made the first payment relative to the bank's quarterly interest cycle. If your first deposit was immediately before the interest compound date, interest would start accruing immediately. If your first deposit was immediately after the interest compound date, interest would not accrue immediately.
Also the bank may calculate interest based on the ending balance or on the average balance for that quarter.
After a long time, I found the answer. However, I cannot understand the formula. isnt RATE/4 as it is quarterly compounded?
=PMT(RATE/12, NPER*12,,FV,1)
I'm trying to figure out what rate of return I would need on an investment in order to compare to paying down a mortgage.
I have calculated the change in the mortgage - I know how much money I'd save by the end of the loan term and how much money I'd need to put in. I'm trying to compare that to an equivalent investment - treat any lump sum payment as the principal of an investment, treat any monthly overpayment as a monthly contribution to an investment, plug in the final value, and solve for the effective rate of return.
I've looked at the RATE and the IRR commands. IRR seems close to what I want, but it wants a series of values for the input flows, but I have it as a periodic regular investment.
For an example with numbers - if I pay an extra $100 a month on the mortgage for 120 months, I can save $10000 in total cost. What command can I use to calculate this in terms of an investment? If I invest $100 a month for ten years and end up with $10000, what was my annualized rate of return?
If I start with principal PV invested at rate R, I contribute monthly payment M for N months, and I end up with final value FV at the end of those N months, I'd like to solve for R given the other variables.
I know there's another factor regarding the mortgage interesting being tax deductible - I'll look at worrying about that after I figure this part out.
:)
Your monthly return is given by this RATE formula
number of periods = 120 (10*12)
contributions of $100 per period
future value of 10,0000
=RATE(10*12,-100,0,10000)
=-0.32% per month
Note as a check =RATE(10*12,-100,0,12000) = 0
which is equivalent to an annual rate of
=1-(1-0.32%)^12
=-3.73%