XL98: How to Calculate Compound Interest

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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, type the following code in a new Visual Basic module:

   Function Yearly_Rate(PV, R, N) 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:

      A1:  1000
      A2:   .08
      A3:     3
   						

   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.