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:
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.
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