Question

Explain in detail how and why you would use FINANCIAL CALCULATIONS when analyzing and evaluating different financial options when working with Excel to solve problems.

Answer 1

It is first important to understand that why I would prefer financial calculations while analyzing and evaluating different financial options when working with Excel to solve problems. I would do it for following reasons:

• Excel contains a bundle of useful and powerful tools and functions.
• It saves a lot of time that is required for financial calculations,
• It contains tools to determine optimal financial solution.
• It helps in solving finance related decision problems.
• It is helpful in breaking optimization problems in order to make the precise decision.
• There are separate excel functions to perform financial calculations.

Now, with following example I will demonstrate how I will use financial calculations while analyzing and evaluating different financial options when working with Excel to solve problems:

• Suppose, I have to determine how to invest excess cash in 1-month, 3-month and 6-month CDs so as to maximize interest income while meeting company cash requirements.
• I will first enter characteristics of different kind of CD’s.
• I will consider the number of CD’s that I must buy in each month as the variable and name them as per convenience.
• Next, there are two constrains. First, is safety margin for each month. And second is it is not possible to enter or buy CD’s in negative amount.
• Then, the main objective i.e. to maximize earned interest is calculated by multiplying the number of CDs bought of each kind by the interest earned for each CD.
• Now, this calculation is simple in excel and mere by a glance a decision can be made.