Microsoft Office Tutorials and References

In Depth Information

Figure 12-1:
Three methods of computing NPV.

The formula in B9 produces a result that differs from the other two. It assumes the $20,000 investment is made

one month from now. There are applications where this is useful, but they rarely (if ever) involve an initial in-

vestment. The other two formulas answer the question of whether a $20,000 investment right now will earn 8%,

assuming the future cash flows. The formulas in C9 and D9 produce the same result and can be used inter-

changeably.

NPV function examples

This section contains a number of examples that demonstrate the NPV function.

All the examples in this section are available in the workbook net present value.xlsx at

this book's website.

Initial investment

Many NPV calculations start with an initial cash outlay followed by a series of inflows. In this example, the

Time 0 cash flow is the purchase of a snowplow. Over the next ten years, the plow will be used to plow drive-

ways and earn revenue. Experience shows that such a snowplow lasts ten years. After that time, it will be

broken-down and worthless. Figure 12-2 shows a worksheet set up to calculate the NPV of the future cash flows

associated with buying the plow.

The NPV calculation in cell B18 uses the following formula, which returns
–$19,880.30: