To ascertain the net present value of your investment using a series of future cash flow and a discount rate, the Excel NPV function which is a financial function can be used to forecast this.
Purpose of the Excel NPV Function
To calculate the net present value using a discount rate and a series of future cash flow
Return Value for the Excel NPV Function
Excel NPV function will return a net present value from series of future cash flows
Logical Arguments used in the Excel NPV Function
- Rate: This is the discount rate that will be used over each period.
- Value1: First value(s) which is a representation of future cash flows.
- Value2: Second value(s) which is a representation of future cash flows (optional).
Figure 1: Example showing how to use the Excel NPV function to calculate the net present value between period 1 through 4 at a discount rate of 10%
The formula used in F8 is:
Note that the initial investment in C7 is not included as a value, and is instead added to the result of NPV this is because the number is a negative value.
Usage Notes about the Excel NPV Function
- If you want to calculate the net present value of an investment using a discount rate and some series of future cash flow, the Excel NPV function will help you do this
- This discount rate is usually for a period only, and it is assumed to be an annual rate.
- Due to the way in which the NPV function is carried out, the Excel NPV function a little tricky to use
- Despite the fact that NPV goes with the idea of a “net value” for the present value of expected future cash flows less than the starting cost for the investment, NPV is actually just the present value of an uneven cash flow in the future.
- To get a correct estimation, one simple trick is to remove the initial investment amount from the argument values used in the NPV function.
Notes to observe while using the Excel NPV function
- Input Values has to be spaced equally in time and they must occur at the end of one period.
- Values must be arranged in a chronological order.