XL: How to Calculate Compound Interest

Compound interest is the amount that a dollar invested now will be worth in a given number of periods at a given compounded interest rate per period.

Although Microsoft Excel does not include a function for determining compound interest, you can use the following formula for this calculation where PV is present value, R is the interest rate, and N is the number of investment periods.

Suppose you have $1,000.00 in an investment account. The account pays 8 percent interest and this interest is compounded annually. How much will the investment be worth at the end of three years? There are two ways to find the amount:

• Use a Fixed Formula
• Create a Function Macro to Determine Compound Interest

Use a Fixed Formula

The following formula typed into a cell on a worksheet, returns the correct value of $1,259.71: However, all of the information is 'hard-coded' into the formula and you must manually change the formula any time the figures change.

Create a Function Macro to Determine Compound Interest

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A custom function is more flexible because none of the actual raw data is 'hard-coded' into the function; the user just types the data for the calculation instead of the actual calculation. To create this custom function, follow these steps:

1. Start Microsoft Excel.
2. Press ALT+F11 to start the Visual Basic Editor.
3. On the Insert menu, click Module.
4. Type the following code in the new module:

   Function Yearly_Rate(PV As Double, R As Double, N As Double) As Double
    
       Yearly_Rate = PV*(1+R)^N    'Performs computation
    
   End Function
   					

To use the custom function, follow these steps:

1. Type the following values in your worksheet:

          Cell     Value
          --------------
          A1     1000.00
          A2         .08
          A3        3.00
   						

   These values represent the following:
   
   
   • A1: Present value of the investment
   • A2: Interest rate
   • A3: Number of investment periods
2. In any blank cell, type the following formula
   =Yearly_Rate(A1,A2,A3)
   where A1, A2, and A3 are the cells that contain the present value, interest rate, and number of investment periods respectively.

The cell in which you typed the formula displays $1,259.71. This is the amount your original investment of $1000.00 is worth after three investment periods at 8 percent compound interest.

"Cost Accounting-A Managerial Approach," Charles T. Horgren, Prentice- Hall,Inc., Fourth Edition, pages 906-907