Microsoft Office Tutorials and References

In Depth Information

**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.