# XL: How to Calculate Compound Interest

For a Microsoft Excel 98 version of this article, see 191017 .

## Summary

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
=PV*(1+R)^N
where PV is present value, R is the interest rate, and N is the number of investment periods.

## More Information

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:
=1000*(1+.08)^3
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.

## References

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