Applies to 
Microsoft Office Excel 2003 

This article was adapted from Microsoft Excel Data Analysis and Business Modeling by Wayne L. Winston. Visit Microsoft Learning to learn more about this book.
This classroomstyle book was developed from a series of presentations by Wayne Winston, a well known statistician and business professor who specializes in creative, practical applications of Excel. So be prepared — you may need to put your thinking cap on.

In this article
Can I use Solver to check out the accuracy of the Excel PMT function or to determine mortgage payments for a variable interest rate?
Can I use Solver to determine how much money I need to save for retirement?
Problems
Sample files You can download the sample files that relate to excerpts from Microsoft Excel Data Analysis and Business Modeling from Microsoft Office Online. This article uses the file FinMathSolver.xls.
The Excel Solver addin program can be a powerful tool for analyzing financial planning problems. In many financial planning problems, a quantity such as the unpaid balance on a loan or the amount of money needed for retirement changes over time. For example, consider a situation in which you borrow money. Because only the noninterest portion of each monthly payment reduces the unpaid loan balance, we know that the following equation (which I’ll refer to as equation 1) is true:
(Unpaid loan balance at end of period t) = (Unpaid loan balance at beginning of period t) – [(Month t payment) – (Month t interest paid)]
Now suppose that you are saving for retirement. Until you retire, you deposit at the beginning of each period (let’s say periods equal years) an amount of money in your retirement account, and during the year, your retirement fund is invested and receives a return of some percentage. During retirement, you withdraw money at the beginning of each year, and your retirement fund still receives an investment return. We know that the following equation (equation 2) describes the relationship between contributions, withdrawals, and return.
(Retirement savings at end of year t+1) = (Retirement savings at end of year t + retirement contribution at beginning of year t+1  Year t+1 retirement withdrawal) * (Investment return earned during year t+1)
Combining basic relationships such as these with Solver enables you to answer a myriad of interesting financial planning problems.
Can I use Solver to check out the accuracy of the Excel PMT function or to determine mortgage payments for a variable interest rate?
Assume you have a $1,037.03 monthly payment (with payments occuring at the end of each month) on a 10month loan of $8,000 at an annual interest rate of 10 percent. Could we have used Solver to determine our monthly payment? You’ll find the answer in the worksheet named PMT By Solver in the file FinMathSolver.xls, which is shown in the following figure.
The key to our model is to use equation 1 to track the monthly beginning balance. Our Solver target cell is to minimize our monthly payment. The changing cell is the monthly payment. The only constraint is that the ending balance in month 10 must equal 0.
I entered the beginning balance in cell B5. I entered a trial monthly payment in cell C5. Then I copied the monthly payment to the range C6:C14. Because we’ve assumed that the payments occur at the end of each month, interest is incurred on the balance at the beginning of the month. Our monthly interest rate (I’ve named cell D1 "rate") is computed in D1 by dividing the annual rate of .08 by 12. The interest paid each month is computed by copying from cell D5 to D6:D14 the formula rate*B5. Each month, this formula computes the interest as .006666 * (month’s beginning balance). By copying the formula (B5(PaymentD5)) from cell E5 to the range E6:E14, we use equation 1 to compute each month’s ending balance. Because (Month t+1 beginning balance) = (Month t ending balance), we compute each month’s beginning balance by copying from cell B6 to B7:B14 the formula =E5.
We are now ready to use Solver to determine our monthly payment. To see how I’ve set up the Solver window, take a look at the following figure.
Our goal is to minimize the monthly payment (cell C5). Note that the changing cell is the same as the target cell. The only constraint is that the ending balance for month 10 must equal 0. Adding this constraint ensures that the loan is paid off. After we select the Assume Linear Model option and the Assume NonNegative changing cells option (these options appear in the Solver Options dialog box; click Options in the Solver Parameters dialog box to select these options), Solver calculates a payment of $1,037.03, which matches the amount calculated by the Excel PMT function.
This model is linear because the target cell equals the changing cell, and the constraint is created by adding multiples of changing cells.
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Can I use Solver to determine how much money I need to save for retirement?
By using equation 2, we can easily determine how much money a person needs to save for retirement. Here’s an example.
I am planning for my retirement, and at the beginning of this year and each of the next 39 years, I’m going to contribute some money to my retirement fund. Each year I plan to increase my retirement contribution by $500. When I retire in 40 years, I plan to withdraw (at the beginning of each year) $100,000 per year for 20 years. I’ve made the following assumptions about the yields for my retirement investment portfolio:
 During the first 20 years of my investing, the investments will earn 10 percent per year.
 During all other years, my investments will earn 5 percent per year.
I’ve assumed that all contributions and withdrawals occur at the beginning of the year. Given these assumptions, what is the smallest amount of money I can contribute this year and still have enough to make my retirement withdrawals?
You can find the solution to this question on the worksheet named Retire in the file FinMathSolver.xls, shown in the following figure. Note that I’ve hidden many rows in the model.
This worksheet simply tracks my retirement balance during each of the next 60 years. Each year I earn the indicated interest rate on the retirement balance. I begin by entering a trial value for my year 1 payment in cell C6. Copying the formula C6+500 from cell C7 to C8:C45 ensures that the retirement contribution increases by $500 per year during years 2–40. I’ve entered in column D the assumed return on my investments for each of the next 60 years. In cells E46:E65, I’ve entered the annual $100,000 withdrawal for years 41–60. Copying the formula (B6+C6E6) * (1+D6) from F6 to F7:F65 uses equation 2 to compute each year’s ending retirement account balance. Copying the formula =F6 from cell B7 to B8:B65 computes the beginning balance for years 2–60. Of course, the year 1 initial balance is 0.
The Solver Parameters dialog box for this model is shown in the following figure. We want to minimize our year 1 contribution (cell C6). The changing cell is also our year 1 contribution (cell C6). We make sure that we never run out of money during retirement by adding the constraint F46:F65>=0. This formula ensures that the ending balance for years 41–60 is nonnegative.
After selecting the Assume Linear Model and Assume NonNegative options and clicking Solve, we find that our first year’s contribution should equal $1,387.87.
This model is linear because the target cell equals the changing cell, and our constraint is created by adding multiples of changing cells. Note that because the return on the investments is not the same each year, there is no easy way to use Excel financial functions to solve this problem. Solver provides a general framework that can be used to analyze financial planning problems when mortgage rates or investment returns are not constant.
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Problems
 I am borrowing $15,000 for a new car. I am going to make 60 endofmonth payments. The annual interest rate on the loan is 10 percent. The car dealer is a friend of mine, and he will allow me to make the monthly payment for months 1–30 equal onehalf the payment for months 31–60. What is the payment during each month?
 Solve the retirement planning problem assuming that withdrawals occur at the end of each year and contributions occur at the beginning of each year.
 Solve our mortgage example assuming that payments are made at the beginning of each month.
 In the retirement planning example, suppose that during year 1 our salary is $40,000, and that our salary increases 5 percent per year until retirement. We want to save the same percentage of our salary each year we work. What percentage of our salary should we save?
 In the mortgage example, suppose that we want our monthly payment to increase by $50 each month. What should each month’s payment be?
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