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Overview of basic Excel functions

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Yale University | Spring 2017

Amir Chireh Mehr, Kristofer Holz, and Ryland Parry

28th of January, 2017

Part I: Introduction to Finance

Introduction to Finance

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 2

Part I: Introduction to Finance

–Internal Rate of Return (IRR)

–Debt and Equity

–Debt Service Coverage Ratio

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Part I: Introduction to Finance

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Part I: Introduction to Finance

PV = FV / (1 + r)n

– PV = Present value of a single cash flow

– FV = Future value of a cash flow

– r = interest rate (also known as discount rate,

hurdle rate, cost of capital etc…)

– n = number of years

– NPV = Σ or net of all PVs from t = 0 to t = n

– Ceteris Paribus, if NPV > 0 we accept the project

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Part I: Introduction to Finance

Can be calculated explicitly: NPV = Σ PVs

Can also be obtained using NPV():

I. =NPV(Rate, Future Values) + FVo ONLY use if FVs are

periodic(e.g. one-year

II. =NPV(r, FV1, FV2,…,FVn) + FVo intervals)

I. =XNPV(Rate, Future Values, Dates)

II. =XNPV (r, FVo:FVn, t0:tn)

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Part I: Introduction to Finance

Insert Inputs

Add Formulae

Extend Formulae

NPV tells us what $5,000 invested today is worth if we receive $750 for two years, and $1,000 thereafter at a 10% discount rate

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Part I: Introduction to Finance

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Part I: Introduction to Finance

IRR: Interest Rate at which the NPV of all cash flows (both

positive and negative) is zero

Formula solves the following equation for rIRR :

– 0 = FV0/(1 + rIRR)0 + FV1/(1 + rIRR)1 + … FVn/(1 + rIRR)n

Can be used to evaluate a project’s attractiveness

– IRR is the actual return given certain cash flows

– If rIRR > discount rate, we accept the project

IRR can be used to measure the return provided to different

investors in the same project

– Unlevered IRR measures the rate of return independent of

capital structure

– Levered (equity) IRR measures the return to equity investors

– IRR can be calculated on a pre- or post-tax basis

IRR and NPV are two sides of the same coin

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Part I: Introduction to Finance

Can be calculated explicitly, but much harder than with NPV

Can also be obtained using IRR():

ONLY use if FVs are

I. =IRR(Future Values, Guess) periodic(e.g. one-year

intervals)

II. =IRR(FVo:FVn, Guess)

I. =XIRR(Future Values, Dates, Guess)

II. =XIRR (FVo:FVn, t0:tn, Guess)

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Part I: Introduction to Finance

Insert Inputs

Calculate

Add Formulae

Why is XIRR() different?

The result tells us that the project’s IRR is 11.5%. This means that if our discount rate were 11.5% rather than 10.0% in the prior NPV

example, then our resultant NPV would have been 0 instead of 325 (try it for yourself)

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Part I: Introduction to Finance

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Part I: Introduction to Finance

Debt: capital borrowed from a lender

– Usually entails repayment at predetermined date(s)

– Repayments are determine according to an amortization schedule,

which details how interest and principal are repaid over a loan’s life

– Debt is usually a senior capital instrument, i.e debt is repaid first

– Lenders take on less risk, and are compensated accordingly (e.g. a

fixed return, but no claim to any upside thereafter)

– Usually gives the owners a claim on the residual cash flows after all

senior (e.g. debt) capital is repaid

– Riskier than debt given the lower priority on the repayment waterfall

– Equity is repaid with capital appreciation (e.g. stock prices increases)

and / or regular payments (e.g. dividends); neither is a given

There exist many capital instruments with debt- and / or equity-like characteristics (e.g. convertible bonds, preferred stock etc.);

however such instruments are beyond the scope of this course.

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Part I: Introduction to Finance

Level Principal Annuity (Mortgage-style) Sculpted

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18

Repay both interest and

Repay a fixed principal annum of periodic debt

principal based on a ‘sculpted’

amount per annum until the service (i.e. principal +

amortization schedule,

loan is repaid + Periodic interest), with the payments

whereby principal and

Interest on outstanding loan being weighted towards

interest payments depend on

balance interest in the earlier periods

a coverage ratio such as DSCR

(as with a home mortgage)

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Part I: Introduction to Finance

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Part I: Introduction to Finance

The periodic ratio of cash flow available for debt service (CADS or

CFADS) over scheduled interest and principal payments (Debt Service)

– CADS = EBITDA – Capex [In most cases]

– EBITDA: Earnings before interest, tax, depreciation and amortization expenses

– Debt Service: schedule interest and principal payments

DSCR used to make sure that there is a sufficient cash flow buffer to

meet debt service needs even if the project underperforms

– PF Lenders often structure loans by sizing the debt using a minimum DSCR

– Typical target DSCRs are in the 1.3x – 1.6x range, depending on a variety of factors

Example DSCR Calculation

– EBITDA = $2,500,000; Capex = $500,000; Total Debt Service = $1,600,000

– What is the DSCR?

– DSCR = CADS / Debt Service

– DSCR = $2,000,000 / $1,600,000

– DSCR = 1.25x

A Debt Service Coverage Ratio of 1.25x means that for every $1 of debt, there is $1.25 of project cash flows available to service debt

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 16

Part I: Introduction to Finance

IRR: Interest Rate at which the NPV of all cash flows (both

positive and negative) is zero

Formula solves the following equation for rIRR :

– 0 = FV0/(1 + rIRR)0 + FV1/(1 + rIRR)1 + … FVn/(1 + rIRR)n

Can be used to evaluate a project’s attractiveness

– IRR is the actual return given certain cash flows

– If rIRR > discount rate, we accept the project

IRR can be used to measure the return provided to different

investors in the same project

– Unlevered IRR measures the rate of return independent of

capital structure

– Levered (equity) IRR measures the return to equity investors

– IRR can be calculated on a pre- or post-tax basis

IRR and NPV are two sides of the same coin

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 17

Part II: Introduction to Excel

Introduction to Excel

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 18

Part II: Introduction to Excel

–Model Structure

–Colour Formatting

–Cell Names, Range Names, Arrays

–Other

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 19

Part II: Introduction to Excel

Model Structure

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Part II: Introduction to Excel

Keep inputs separate from calculations and model outputs

Inputs Calculations Outputs

Keep all inputs in as few Should take your static Should include the

tabs / cells as possible; inputs and perform results of your

calculations necessary calculations and that

Keep all input tabs in to obtain outputs; which you plan to

one section of present to others;

workbook; Format calculation cells

so that it is clear that Format output cells so

Never duplicate the they should not be that it is clear that they

same input in two changed. should not be changed.

different locations.

Think about your model structure from the get-go, as doing so can significantly simplify the modelling exercise

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 21

Part II: Introduction to Excel

For simple models, one can keep inputs, calculations and outputs on one tab

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Part II: Introduction to Excel

More complex models may require separate tabs

– Separate tabs also increase the ease of auditing the model

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 23

Part II: Introduction to Excel

Colour Formatting

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 24

Part II: Introduction to Excel

what can be altered (assumptions) and

what should not be modified (formulae)

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 25

Part II: Introduction to Excel

Source: Gross, Daniel. “F&ES 635b / MGT 683 Renewable Energy Project Finance Modeling.” Class lecture, Session 4: Variability and Sensitivity

Analysis Best Practices in Modeling from Yale University, April 4, 2016.

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 26

Part II: Introduction to Excel

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 27

Part II: Introduction to Excel

identify and refer to a single cell, or a range (group)

of cells in a worksheet

One can use cell and name ranges in a variety of

formulae across the model

Cell ranges or individual cells are often named after

specific data they include e.g. inflation escalator,

PPA price etc.

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 28

Part II: Introduction to Excel

Using formulae update columns: (i) Revenue; (ii) Subtotal; and (iii)

Total

Name ranges for all columns e.g. Quantity

Sum Grand Totals for (i) Quantity; and (ii) Total using named ranges

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 29

Part II: Introduction to Excel

Define range names for (i) Units; and (ii) Unit Price.

Using an array and range names previously defined, populate Total Sales (mark all

cells E3:E13 -> insert formula “=Units*Unit_Price” -> press CTRL+SHIFT+ENTER

(RETURN on Mac):

Using range names populate Grand Total for the following: (i) Units; and (ii) Total

Sales.

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 30

Part II: Introduction to Excel

Array formulas also offer these advantages:

Consistency: if one clicks any of the cells in an array,

ones sees the same formula. This consistency can help

ensure greater accuracy.

Safety: one cannot overwrite a component of a multi-

cell array formula. One must either select the entire

range of cells and change the formula for the entire

array, or leave the array as is.

Smaller file sizes: You can often use a single array

formula instead of several intermediate formulas.

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 31

Part II: Introduction to Excel

Other

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 32

Part II: Introduction to Excel

To fix a reference cell place $ symbols in front of the column letter

and row number e.g. $H$3 for Conversion Rate below

Press F4 (SHIFT + COMMAND + K for Mac) over a relevant part of the

formula to cycle through different fixed reference possibilities

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 33

Part II: Introduction to Excel

Other (2/4)

Use the same formulae across an entire row. This practice

makes it easier to audit or modify the model

Use the same column for the same period (across tabs and

within tabs)

Create new tabs if you intend to introduce periodicity into

your model (e.g. a separate quarterly income statement tab

versus a summary annual income statement tab)

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 34

Part II: Introduction to Excel

Other (3/4)

Use consistent number formatting

– Units specified in the model (separate column)

– Inputs, calculations and outputs must be expressed in consistent

units e.g. $000, $MM, $/MWh

– Ensure negative numbers stand out from positive numbers e.g.

($11,135,745) vs. $1,021,841

Never embed hard-coded numbers in formulae; instead

store them as separate inputs in assumptions (inputs) tab:

– Poor practice: {=annual_output_series*ppa_price*(1+2%)^1}

– Best practice: {=annual_output_series*ppa_price*ppa_escalator}

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 35

Part II: Introduction to Excel

INDEX(MATCH(()) is a lookup function, which searches a range/array for a value

The formula should be applied as such:

=INDEX(Range containing Desired Value, MATCH(Lookup Value, Lookup Range, 0))

– 0 = exact match; 1 = less than; and 2 = greater than

=INDEX(C2:C55,MATCH(F2,A2:A55,0)

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 36

Part II: Introduction to Excel

Demo

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 37

Part III: Questions and Answers

Renewable Energy Project Finance| Excel and Finance Bootcamp | Yale University 38

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