If we want to calculate the net present value of an investment using a given discount rate, we can make use of the excel NPV function. This article will guide you on how to utilize this function to find the net present value.
Figure 1: Using NPV function to find net present value
General syntax of the formula
=NPV (rate, value1, [value2]…)
- Rate- refers to the discount rate over a single period
- Value1- this is the first value that represents the cash flow, it is mandatory
- Value2- refers to the second value that represents the cash flow, it is optional
Understanding the formula
When supplied with the discount rate and a series of cash flows, the NPV function is able to calculate the net present value of an investment. Here, the rate is assumed to be annual, and is applied per each period. You should note that NPV ideally refers to the net value, but in real sense it is present value of uneven cash flows. You can still get the same answer if you remove the initial invested amount from the argument values that have been used in the NPV function.
For you to work with this formula;
- The values must be arranged in a chronological order
- Values should be equally spaced in time and occur at the end of each given period.
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