Microsoft Office Tutorials and References

In Depth Information

You can look at the snowplow example in a different way. In the previous example, you knew the cost of the

snowplow and included that as the initial investment. The calculation determines whether the initial investment

would produce a 10% return. You can also use NPV to tell what initial investment is required to produce the re-

quired return. That is, how much should you pay for the snowplow? Figure 12-3 shows the calculation of the

NPV of a series of cash flows with no initial investment.

The NPV calculation in cell B18 uses the following formula:

=NPV($B$3,B7:B16)+B6

Figure 12-3:
The NPV function can be used to determine the initial investment required.

If the potential snowplow owner can buy the snowplow for $180,119.70, it will result in a 10% rate of return —

assuming that the cash flow projections are accurate, of course.