Financial function – NPV function
Overview
Financial functions perform various calculations when
analyzing investments:
• NPV function determines the value of future dollars, in
terms of today’s dollars, using a standard discount rate
• The NPV formula is shown here:
• Determined by calculating the costs (negative cash flows)
and benefits (positive cash flows) for each period of
an investment
Uses and Applications
• NPV provides a measurement of the profitability of an
undertaking
• It is an indicator of how much value an investment or
project adds to a firm
Syntax
=NPV(rate, value1, value2, …)
=NPV(the rate of discount over one period, payment or
income equally spaced in time occurring at end of period,
payment or income equally spaced in time occurring at
end of period, …)
Tips and Tricks
• Payments must be equally spaced in time
• Can have up to 254 payments
• For any cash flow at beginning of first period subtract
this value must be added to result
• Default is to have each payment occur at end of period
• NPV uses the order of values input to determine
chronological ordering of cash values
Function Rate Value Value
 Financial function – IRR function
Overview Syntax
Financial functions perform various calculations when =IRR(values, [guess])
analyzing investments: =IRR(An array containing values to calculate the
• The IRR function calculates the discount rate that would internal rate of return, an optional estimate of what you
return an NPV of zero think the IRR will be)
• The IRR formula is shown here:
• Determined using an iterative approach in Excel

Uses and Applications Tips and Tricks

• IRR helps compare the profitability of investments
• Compare capital projects, determine stock buybacks,
useful in private equity decisions
• IRR provides you with a rate to compare investments but will not
help in understanding the magnitude of profits between
investments
• Values must contain at least one positive value and one negative
value to calculate the internal rate of return
• IRR should not be used to rate mutually exclusive projects
• IRR uses the order of values to interpret the chronological
order of cash flows

Function Rate Estimate of IRR