1. Using Spreadsheets in Eng Econ (Separating Principle and Interest) ©2002 Dr. Bradley C. Paul

2. The tax deduction and equity problem  The handy magic numbers are designed to sweep cash in standard positions into the pot.  We can always get questions they really weren’t designed to answer  This case - how much is interest and how much is building equity  Enter another answer - the spreadsheet

3. Setting Up Our Spreadsheet A speadsheet is a series of cells into which we type words, numbers or formulas. It will calculate the values for us automatically (it’s a nice little calculator). Because we can copy formula’s around it can help us avoid key punch errors or redo our homework quickly if we find we have made just one little mistake. I often use convention of coloring cell yellow where I want someone to put in a number.

4. Putting in a Formula I entered formula =c3/100/12 Each cell in the spreadsheet has a name. I can tell my formula to look in a specific cell for a value. This is how I can build formulas that refer to information I can change. (Remember I have two bank loans to work with). In Excel I have to start a formula with = The / sign means divide just like on a calculator.

5. Copy Formula Trick I entered 1 in cell a7 I entered =a7+1 into cell a8 I will click on that cell and copy it to the cells below. When I copy the formula each cell will refer to the one above it. (ie- cell a12 will say = a11 + 1)

6. Developing the Spreadsheet You can see what happened when I copied the formula I entered = b7*c4 I entered =c7-d7 I entered =b7-e7

7. More Formula Copying I entered =c7 in cell c8 and then copied. Thus each cell simply copies the one above it. What if I want to refer to the same cell each time and copy a formula? My interest cell multiplies the outstanding principle by c4 the monthly interest rate and I want to keep the same interest. Lets Change formula in cell d7. Right now it says = b7*c4 In Excel, putting a dollar sign in front of part of a cell name makes it stay the same when copied. In this case I want the 4 part of c4 to stay the same = b7 * c$4 We’ll make next periods principle equal to what was left from the time before. = f7

8. Copy the Formulas Notice that with time the amount of money going to Principle increases and interest decreases as the debt is paid-off. Equity is the difference between what the house is worth and what the unpaid load is. Enter formula =b$7-f7 and copy the formula

9. Magic at the End In year #1 Herby will pay $1983.21 in potentially tax deductible interest In year #2 Herby has $1907.90 in deductions In year #3 $1826.34 In year #4 $1738.01 In year #5 $1642.35 In year #6 (before the house is resold) $1164.23 When the house resells - Herby will have $6358.68 in equity The question of whether Herby gets a deduction depends on whether his itemized deductions exceed the standard deduction.

10. Tax Assumption  Lets assume Herby can deduct his interest, but that he is only in the 15% tax bracket  The money Herby saves on his taxes may be a positive flow into his pocket as a refund check  Year #1 $1983 * 0.15 = $297.48  Year #2 $1907.9 * 0.15 = $286.19  Year #3 $1826.33 *0.15 = $273.95  Year #4 $1738.01 * 0.15 = $260.70  Year #5 $1642.35 * 0.15 = $246.35

11. Cash Flow for Buying with Local Loan 0 1 - 12 13 - 24 25 - 36 37 - 48 49 - 60 61 - 69 73 $3,535 $240.88 per month $6,358.68 $297.48$286.19$273.95$260.70 $246.35 $174.63

12. Can do the Same Thing for the Internet Loan Note that with the spreadsheet I just retyped the 3 numbers in yellow and it did my whole interest, tax, and equity problem for me instantly

13. Cash Flow for Internet Loan 0 1 - 12 13 - 24 25 - 36 37 - 48 49 - 60 61 - 69 73 $4,060 $157.49 per month $238.52$235.64$232.55$229.27$225.79$166.92 $1630.95