Solved

Calculating APR using Newton Raphson - excel spreadsheet

Posted on 2014-01-06
4
1,532 Views
Last Modified: 2014-01-09
I am trying to calculate APR based on UK rules. Here is a booklet with some details in

http://www.creditunion.ie/files/file_20050316024652OFT%20-%20Credit%20Charges%20and%20APR.pdf

The formula is on page 9.

Later on the booklet advises how to solve the formula (p52) using Newton Raphson and I need help doing this

The first step is to calculate ¿PV which represents the sum (total) of the PVs for the instalments minus the sum of the PVs for the advances.

I am not sure what the difference is between an installment and an advance? I am assuming an installment is a repayment. The booklet says there is normally one advance so I am presuming it is the amount borrowed. The booklet says PV is calculated according to the formula PV = Ax^t

The next step is to calculate ¿dV which represents the sum of the dVs for the instalments minus the sum of the dVs for the advances. The derivative is calculated as tAx^(t-1).

I have put all of these steps into a spreadsheet and I hope they are right. I have put in an initial guess of x as 1.001 as recommended by the booklet. However if i then take my new value of x as calculated by the spreadsheet and feed it back in (0.95) at cell B4, the answer for the apr moves further away. Please can you advise where I am going wrong in my calculations. I thought that by feeding the value for x back in manually I would be simulating solving the problem by Newton Raphson

http://www.dev3.co.uk/temp/interest_calculator.xlsx

Many thanks in advance for any help you can give.
0
Comment
Question by:andieje
[X]
Welcome to Experts Exchange

Add your voice to the tech community where 5M+ people just like you are talking about what matters.

  • Help others & share knowledge
  • Earn cash & points
  • Learn & ask questions
  • 2
4 Comments
 
LVL 24

Expert Comment

by:Steve
ID: 39764920
Can I ask why you are using the Newton method and not the IRR method?
0
 
LVL 24

Expert Comment

by:Steve
ID: 39764938
File attached with IRR method.
interest-calculator.xlsx
0
 
LVL 19

Accepted Solution

by:
Ken Butters earned 500 total points
ID: 39765623
Attached is the update for the Newton Method.

The main error was in CELL D30

In this case you had a loan for 10,000.   The present value for the loan at time zero is always going to be 10,000.

Once that change was made, then repeatedly copying the value from Cell B33 to Cell B4 results in the correct interest rate in cell B34.

Without that change your present value of the loan kept incorrectly changing... forcing you to get further and further away from the true interest rate.
interest-calculator.xlsx
0
 

Author Closing Comment

by:andieje
ID: 39768658
Thank you so much. I was so close :)
0

Featured Post

Creating Instructional Tutorials  

For Any Use & On Any Platform

Contextual Guidance at the moment of need helps your employees/users adopt software o& achieve even the most complex tasks instantly. Boost knowledge retention, software adoption & employee engagement with easy solution.

Question has a verified solution.

If you are experiencing a similar issue, please ask a related question

Some code to ensure data integrity when using macros within Excel. Also included code that helps secure your data within an Excel workbook.
When we purchase storage, we typically are advertised storage of 500GB, 1TB, 2TB and so on. However, when you actually install it into your computer, your 500GB HDD will actually show up as 465GB. Why? It has to do with the way people and computers…
This Micro Tutorial demonstrates how to create Excel charts: column, area, line, bar, and scatter charts. Formatting tips are provided as well.
This Micro Tutorial demonstrates in Microsoft Excel how to consolidate your marketing data by creating an interactive charts using form controls. This creates cool drop-downs for viewers of your chart to choose from.

729 members asked questions and received personalized solutions in the past 7 days.

Join the community of 500,000 technology professionals and ask your questions.

Join & Ask a Question