Microsoft Office Tutorials and References
In Depth Information
Chapter 12: Discounting and Depreciation Formulas
Figure 12-1: Three methods of computing NPV.
The formulas in row 9 are as follows:
The formula in B9 produces a result that differs from the other two. It assumes the $20,000
investment is made one month from now. There are applications where this is useful, but they
rarely if ever involve an initial investment. The other two formulas answer the question of
whether a $20,000 investment right now will earn 8%, assuming the future cash flows. The
formulas in C9 and D9 produce the same result and can be used interchangeably.
NPV function examples
This section contains a number of examples that demonstrate the NPV function.
All the examples in this section are available in the workbook net present value.
xlsx on the companion CD-ROM.
Many NPV calculations start with an initial cash outlay followed by a series of inflows. In this
example, the Time 0 cash flow is the purchase of a snowplow. Over the next ten years, the plow
will be used to plow driveways and earn revenue. Experience shows that such a snowplow lasts
ten years. After that time, it will be broken-down and worthless. Figure 12-2 shows a worksheet
set up to calculate the NPV of the future cash flows associated with buying the plow.
The NPV calculation in cell B18 uses the following formula, which returns –$19,880.30: