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Sometimes you know the result that you want but you are not sure what the data inputs should be to get you there. Well, Excel has this great feature called Goal Seek that will let you tell it what the answer is and it will figure the rest out for you. It's kind of like that game show where they give you the answer and you have to guess the question. Well, by way of an example, our Two Trees Extra Virgin Olive Oil Company, they need a capital loan for a new equipment, because they want to expand production. So they are going to borrow some money and we are going to use the Payment function to help them determine how much they can borrow.
Let's just go to Sheet2 here for a second. The Payment function has three arguments to it. The first is the interest rate that you are going to pay. The second argument is how many periods will you pay that back over. And the third argument is what is the present value of the loan, which is kind of a financial way of saying how much money do you want. So let's go here to Sheet1 and let's just take a look. Two Trees wants to borrow about $100,000. They expect that they are going to pay an interest rate of 6% and it will take about 10 years to pay it off.
What they want to know with that Payment function is every month when they write that check, how much will that check be? So let's click here on Cell D8 and we will use the Payment function to figure it out. So we say =PMT, open up the parentheses, and the first thing as we said is what is the interest rate, and here we have the interest rate as 6%. Now, you want to be careful because this isn't 6% per month. This is 6% per year and the company is going to have to write a check every month, so we have to convert this 6% yearly to a monthly.
So we simply divide by 12. So yearly interest rate divided by 12 is our monthly interest rate. Well, that's our first argument, so type a comma. The second thing we need to figure out is how many periods? Now, we can see here in Cell D7, it will be 10 years, but we are not going to write a check every year. We are going to write a check every month. So click that 10 years and we multiply by 12. So type *12, so that's 10 years times 12 months. So we know that it will be 120 months.
Type a comma, and now the present value. Well, the present value of the loan, because let's say we are getting the amount today, we haven't paid anything back, the present value is the initial amount. It is that $100,000. Press Ctrl+Enter and now we can see that with these numbers every month Two Trees Olive Oil will have to write a check of about $1,100. Now, you might be wondering, hey, that looks like a negative number. Is that what that is? Well, yes, it is. It's a negative number because the cash flow is going from Two Trees' bank account out.
So that's why it's a negative number. Well, if that looks a little weird to you, you can fix that. Let's double-click here on that $100,000 and we can simply make that a negative number, and now that payment turns into a positive number. So we have that negative $100,000 because we are going to pay that back and now we have a positive number for our monthly payment. Whichever way you like is fine. So here's where Goal Seek comes into play. Let's say Two Trees says well, $1,100. Maybe that's a little too much. We want to make that an even $1000.
Well, to make that an even $1,000 a month, something has to change. Either we borrow less money, or we find a bank that will give us a lower interest rate, or maybe we pay it off over a longer period of time. So click that $1,100 and now we go up to the Data menu and over here we click that What-If Analysis and choose Goal Seek. Let's just move this over here. So the cell that we are setting it already identifies as D8, because that's what we have selected, and click over here.
The value that we want is an even 1,000, and just press Tab, and what cell do we want to change? Well, let's say we will reduce the monthly payment by borrowing less money. So where it says By changing cell, click that, $100,000, click OK, and it calculates it and it finds out that at 6% over 10 years, we would have to borrow $90,073 to have an even $1,000 payment. Now, there's two things we can do. If we click OK, it will leave these numbers permanent. If we click Cancel, it will go back to the original numbers.
Well, let's look at the opposite. Maybe Two Trees is flush. We are selling olive oil like crazy and maybe the company can afford $1,500 a month. So again go back to What-If Analysis, go to Goal Seek, and again the cell that we are going to change is the same as Cell D8 and the value we are going to set it to is 1,500. And the cell we are going to change, rather than the amount we are borrowing, we figure 100,000 is enough, but maybe we could afford a higher interest rate or maybe we can pay this off over a shorter period of time.
So click that years, click OK, and now it tells us that rather than paying it over 10 years, we can pay it back over about 6 and 2/3 years, so that we can pay the higher amount of $1,500 at 6% per year of $100,000 loan. Click OK and now you see that number is permanent. So Goal Seek is great when you want to change just one variable at a time, but there are a few other features you could use in Excel that will let you change multiple values at a time and that's using the Table feature.
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