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Using the NPV Function to Determine Net Present Value
Using the
Using the NPV
NPV Function to Determine Net Present Value
Function to Determine Net Present Value
Suppose that you have a pile of cash. You have the opportunity to invest
that cash in a long-term CD that earns 2% interest. You also have the op-
portunity to use that cash to buy a business. The 2% is called the hurdle
rate. If the business cannot return more than the 2% hurdle rate, you should
probably look for another business.
You have analyzed the business plan and projected that the business will
generate a certain series of net income over each of the next 5 years. You can
analyze the net present value of the investment by using the NPV function.
Syntax:
NPV(rate,value1,value2,...)
The NPV function calculates the net present value of an investment by using
a discount rate and a series of future payments (negative values) and income
(positive values). This function takes the following arguments:
rate
rate This is the rate of discount over the length of one period.
value1, value2, ...
value1, value2, ... These are 1 to 254 arguments representing the
payments and income. Instead, you can refer to a range of values.
value1, value2, ...must be equally spaced in time and occur at the end
of each period. The function uses the order of value1, value2, ...to in-
terpret the order of cash flows. You need to be sure to enter your
payment and income values in the correct sequence.
The NPV investment begins one period before the date of the value1cash flow
and ends with the last cash flow in the list.
Arguments of value1,value2,...are cash flows at the end of Year 1, Year 2,
and so on.
In this example, if you buy a business for \$50,000, this amount should not be
entered as a value in the function. Instead, you should subtract the \$50,000
from the result of NPV.
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