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In this tutorial, Mr. Chips demonstrates how to insert an image from an Excel sheet into a Microsoft Word document using mail merge. He explains that you can easily insert images to a Word document by adding them in your Excel sheet first. By creating a table, you can control the size and placement of the image within the Word document. Mr. Chips advises creating a list of images for all students, adding a field for each student's profile picture. This process allows you to add pictures anywhere in the Word document, with the flexibility to customize the layout according to your preferences.