*Most important 10 calculations useful in our professional life*
*M*anaging money can involve calculations to understand the worth of an
investment. To arrive at a result, calculations can be done in a different
way or by using a different formula.
Even the same formula can be used differently to arrive at a certain result.
Here are a few commonly used money management formulas. Use an excel sheet
to do these.
1. *Compound Interest*
I want to take a loan of Rs 1 lakh to buy a used car. How much will the car
cost me at an annual interest rate of 8 per cent for four years?
The compound interest formula can be used here to calculate the final cost,
which would include the loan amount and the interest paid. The amount that
is actually paid for Rs 1 lakh is Rs 1,36,048.90. The total amount of
interest charged for borrowing Rs 1 lakh is Rs 36,048.90.
Formula: Future value = P(1 + R)^N
Type in: =100000(1+8%)^4 and hit enter. P: amount borrowed; R: rate of
interest; N: time in years.
Also used for: Calculating the maturity value on lumpsum investment (bank
fixed deposits and National Savings Certificate, for example) over a fixed
period at a certain rate of interest.
*2.** Compound Annualised Growth Rate*
*I* had invested Rs 1 lakh in a mutual fund five years back at an NAV of Rs
20. Now the NAV is Rs 70. How should I calculate my returns on an annual
basis?
Compound annualised growth rate (CAGR) will be used here to calculate the
growth over a period of time. The gain of Rs 50 over five years on the
initial NAV of Rs 20 is a simple return of 250 per cent (50/20 * 100).
However, it should not be construed as 50 per cent average return over five
years.
Formula: CAGR = {[(M/I)^(1/N)] ? 1} * 100
Type in: =(((70/20)^(1/5))-1)*100 and hit enter. M: maturity value; I:
initial value; N: time in years. CAGR here is 28.47%.
Also used for: Calculating the annualised returns on a lumpsum investment in
shares.
*3.** Internal Rate of Return*
*I* paid Rs 18,572 every year on a moneyback insurance policy bought 20
years back. Every fifth year, I received Rs 40,000 back and Rs 4.5 lakh on
maturity. What was my rate of return?
The internal rate of return (IRR) has to be calculated here. It is the
interest rate accrued on an investment that has outflows and inflows at the
same regular periods.
In the excel page type Rs 18,572 as a negative figure (-18572), as it is an
outflow, in the first cell. Paste the same figure till the twentieth cell.
Then, as every fifth year has an inflow of Rs 40,000, type in Rs 21,428
(40,000-18,572) in every fifth cell. In the twentieth cell, type in ?18572.
In the twenty first cell, type in Rs 4,50,000, which is the maturity value
of the policy.
Then click on the cell below it and type: = IRR(A1:A21) and hit enter.
5.28% will show in the cell. This is your internal rate of return.
Also used for: Calculating returns on insurance endowment policies.
*4.** XIRR*
*I* bought 500 shares on 1 January 2007 at Rs 220, 100 shares on 10 January
at Rs 185 and 50 shares at Rs 165 on 18 May 2008. On 21 June 2008, I sold
off all the 650 shares at Rs 655. What is the return on my investment?
XIRR is used to determine the IRR when the outflows and inflows are at
different periods. Calculation is similar to IRR's. Transaction date is
mentioned on the left of the transaction.
In an excel sheet type out the data from the top most cell as shown here.
Outflows figures are in negative and inflows in positive. In the cell below
with the figure 4,25,750, type out
=XIRR (B1:B4,A1:A4)*100
Hit enter. The cell will show 122.95%, the total return on investment.
Also used for: Calculating MF returns, especially SIP, or that for
unit-linked insurance plans.
*5.** Post-Tax Return*
*M*y father wants a bank FD at 10 per cent return for five years. He pays
income tax. What will be the returns?
The post-tax return has to be calculated here. The idea is to know the final
returns on a fully taxable income. Interest income from the bank is taxed as
per your tax slab.
Formula: ROI ? (ROI * TR)=Post-tax return
Type in: =10 ? (10 * 30.9%) and hit enter. You will get 6.91%
ROI: rate of interest; TR: tax rate (depends on tax slab)
Also used for: Calculating post-tax returns of national savings
certificates, post-office time deposits, and Senior Citizens' Savings
Scheme.
*6.** Pre-Tax Yield*
*M*y brother says that the investment in public provident fund (PPF), which
gives 8 per cent, is the best. Isn't 8 per cent a low rate of return?
An investment's pre-tax yield tells us if its return is high or low. The
return on PPF (8 per cent) is tax-free. Also, this has to compared with
returns of a taxable income to estimate its worth. For someone paying a tax
of 30.9 per cent, the pre-tax yield in PPF is 11.57 per cent. At present,
there is no fixed, safe and assured-return option that has 11.57 per cent
return and a post-tax return comparable to PPF's 8 per cent.
Formula: Pre-tax yield = ROI / (100-TR)*100
Type in: =8/(100-30.9)*100 and hit enter. You will get 11.57%. ROI: rate of
interest, TR: tax rate, (depends on tax slab)
Also used for: Calculating the yield on an Employees' Provident Fund or any
other tax-free instrument.
*7.** Inflation*
*M*y family's monthly expense is Rs 50,000. At an inflation rate of 5 per
cent, how much will I need 20 years hence with the same expenses?
The required amount can be calculated using the standard future value
formula. Inflation means that over a period of time, you need more money to
fund the same expense.
Formula: Required amt.=Present amt. *(1+inflation) ^no. of years
Type in: =50000*(1+5% or .05)^20 and hit enter. You will get Rs 1,32,664 as
the answer, which is the required amount.
Also used for: Calculating maturity value on an investment.
*8.** Purchasing Power*
*M*y family's monthly expense is Rs 50,000. At an inflation rate of 5 per
cent, how much will be the purchasing value of that amount after 20 years?
Inflation increases the amount you need to spend to fetch the same article
and in a way reduces the purchasing power of the rupee. Here, Rs 50,000
after 20 years at an inflation of 5 per cent will be able to buy goods worth
Rs 18,844 only.
Formula: Reduced amt.= Present amt. / (1 + inflation) ^no. of yrs
Type in: =50000/(1+5%)^20 and hit enter. You will get Rs 18,844, which is
the reduced amount.
*9.** Real Rate of Return*
*M*y father wants to make a one-year bank FD at 9 per cent. On maturity, he
says, the capital will be preserved and he would get assured return on it.
It is true that fixed deposit is safe and gives assured returns. However,
after adjusting for inflation, the real rate of return can be negative.
Formula: Real rate of return=[(1+ROR)/(1+i)-1]*100
Type in: =((1+9%)/(1+11%)-1)*100 and hit enter. -1.8% is the real rate of
return. ROR: Rate of return per annum; i: rate of inflation (11 per cent
here).
*10.** Doubling, Tripling of Money*
*I* can get 12 per cent return on my equity investments. In how many years
can I double or even triple my money?
Formula: No. of years to double = 72/expected return
Type in: =72/12 and hit enter. You will get 6 years. For tripling, type in:
=114/12 and hit enter. You will get 9.5 years. For quadrupling, type in:
=144/12 and hit enter to get 12 years.
or
*Rule of 72:** - Money will be doubled *
*
72/rate of return*
Ex: Rate of return is 8%
72/8=9 (i.e if the rate of interest 8% Principal amount will be doubled with
in 9 years)
*
Rule of 112: - Money will be Triple*
112/rate of return
Ex: Rate of return is 8%
112/8=14 (i.e if the rate of interest 8% Principal amount will be Tripled
with in 14 years)
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