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Using the NPV Function to Determine Net Present Value
Note
NPV requires the cash flows to occur at a regular rate. If you in-
stead have a series of projected cash flows on varying dates, you
should use XNPV instead. See the section Using XNPV to Calculate
the Net Present Value When the Payments Are Not Periodic , later in
this chapter.
NPV is similar to the PV function. The primary difference between PV and NPV
is that PV allows cash flows to begin either at the end or at the beginning of
the period. Unlike the variable NPV cash flow values, PV cash flows must
be constant throughout the investment.
NPV is also related to the IRR function. IRR is the rate for which NPV equals
zero: NPV(IRR(...), ...) = 0.
In Figure 13.13 , the business will cost $50,000. The business will lose $5,000
in Year 1 and then generate $61,000 over the next 4 years. Based on these cash
flows, NPV is positive, which means that the investment will do better than a
CD at 2% interest.
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