I. Intro
The NPV function calculates the net present value of a series of regularly distributed cash flows based on a discount rate.
Note: Net present value, a key indicator for project planning, is the difference between the present value of future income and the present value of future expenditure. Net present value = present value of all future cash flows – present value of initial investment.
II. About the function
- Formula: =NPV(rate,value1,[value2,...])
- Parameters:
- rate (required): The discount rate over one period.
- value1 (required): The first cash flow.
- value2,... (required): Additional cash flows.
- Example: =NPV(8%,200,250)
- Note:
- Although the NPV and PV functions are similar, the PV function allows cash flow to be distributed at the beginning or the end of the period. Every cash flow amount for PV is the same for the entire investment period whereas cash flows for NPV can vary.
- The IRR function assumes NPV to be zero.
- The NPV function assumes that investment begins on the same day as value1 in the previous period, and ends with the final cash flow. Since NPV is based on future cash flows, if the first cash flow occurs at the beginning of the first period, then it should be added to the result and not be included in the parameters.
III. Steps
Use the NPV function
- Select a cell and enter =NPV.
- Enter the parameters in the cell. For example: =NPV(B2,B3,B4).
- Press Enter to get the result, which is 399.5198903 in this example.
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Delete the NPV function
Select the cell with the NPV function, and press Delete.
IV. Use cases
Finance: Calculate a project's NPV
The net present value of income and expenditure is essential for project analysis. The NPV function speeds up these complex calculations considerably.
- Formula used below: =NPV(B2,B3,B4,B5,B6)
- About the parameters: The initial investment is made one year from today, and since it's an expenditure, it is negative. Profits, or positive cash flows, are generated in subsequent years, and the NPV of these positive and negative cash flows are calculated based on the discount rate.
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