Calculating Net Present Value in Excel

This worksheet demonstrates examples of using an Excel function to find the net present value of an investment. Net present value is calculated using a discount rate (which may represent an interest rate or the rate of inflation) and a series of future payments (negative values) and income (positive values). The NPV formula [NPV(rate,value1, value2,...)]consists of three fields. Rate is the periodic discount rate over the length of the project. Value1 and Value2 are 1 to 29 arguments representing the payments and income. These values must be equally spaced in time and occur at the end of each period. NPV uses the order of Value1, Value2, to interpret the order of cash flows. Be sure to enter payment and income values in the correct sequence. Arguments that are numbers, empty cells, logical values, or text representations are counted. Empty cells, logical values, text, or error values are ignored. Excels method of calculating NPV assumes that the first value occurs one period from the present. Many investments projects call for an immediate initial investment, followed by a stream of cash flows in subsequent periods. If this is the case, you must exclude the initial investment from the NPV calculation in Excel by calculating the NPV of the cash flow stream and subtracting the initial investment from the NPV calculation to get the actual NPV for the project. This example assumes an investment of $10,000 one year from today; an annual income of $3,000, $4,200, and $6,800 in the three years that follow; an annual discount rate of 10%. Follow these steps to use Excel's NPV function to find the net present value for an investment:

1) Select the output cell for the solution. (For this example, use cell B57.) 2) Click the function button (fx ), select All in the left pane to display all Excel functions, and double-click NPV in the right pane. Note: When you click on NPV, the formula is shown at the bottom of the Paste Function dialog box: =NPV(rate,value1,value2,...). 3) The cursor automatically appears in the "Rate" field, prompting you for the required data. Enter the rate. (For this example, the rate is 10%, or .10.) 4) Enter data for the remaining data fields. For "value1," enter -10000. For "value2," enter 3000. (When you click in the value2 box, a box appears for "value3," and so on) For "value3," enter 4200. For "value4," enter 6800. Note: As the cursor moves from field to field, the definition of each respective field is shown at the bottom of the NPV function box. The formula bar should now contain the formula: =NPV(10%,-10000,3000,4200,6800). 5) After you have entered the required data, click OK. Excel displays the result in the output cell. The result for this example is $1,188.44. In this example, you include the initial $10,000 cost as one of the values because the payment occurs at the end of the first period. Copyright 2001 UNext.com LLC. All rights reserved.

10% -10000 3000 4200 6800