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.) 10%
-10000
2) Click the function button (fx), select All in the left pane to display all Excel functions, and 3000
double-click NPV in the right pane. 4200
6800
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.
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