Microsoft Office Tutorials and References
In Depth Information
Figure 12-6: The NPV function can include an initial value and a terminal value.
The following formula indicates that at a $360,000 asking price, the discounted positive cash at the desired rate
of return is $68,214.11:
The resulting positive NPV means that the investor can pay the asking price and make more than his desired
rate of return. In fact, he could pay $68,214.11 more than the asking price and still meet his objective.
Although the typical investment decision may consist of an initial cash outflow resulting in periodic inflows,
that's certainly not always the case. The flexibility of NPV is that you can have varying amounts, both positive
and negative, at all the points in the cash flow schedule.
In this example, a company wants to roll out a new product. It needs to purchase equipment for $475,000 and
will need to spend another $225,000 to overhaul the equipment after five years. Also, the new product won't be
profitable at first but will be eventually.
Figure 12-7 shows a worksheet set up to account for all of these varying cash flows. The formula in cell E18 is