Microsoft Office Tutorials and References

In Depth Information

**Chapter 12: Discounting and Depreciation Formulas**

The NPV calculation is in cell B16, which contains the following formula:

=NPV(B3,B7:B13)+B6

This example might seem unusual, but it is common in real estate situations in which rent is paid

in advance. This calculation indicates that you can pay $197,292.96 for a rental property that pays

back the future cash flows in rent. The first year’s rent, however, is due immediately. Therefore,

the first year’s rent is shown at Time 0.

Terminal values

The previous example is missing one key element: namely, the disposition of the property after

seven years. You could keep renting it forever, in which case you need to increase the number of

cash flows in the calculation. Or you could sell it, as shown in Figure 12-5.

Figure 12-5:
The initial investment may still have value at the end of the cash flows.

The NPV calculation in cell D15 is

=NPV(B3,D7:D13)+D6

In this example, the investor can pay $428,214.11 for the rental property, collect rent for seven

years, sell the property for $450,000, and make 10% on his investment.

Initial and terminal values

This example uses the same cash flows as the previous example except that you know how much

the owner of the investment property wants. It represents a typical investment example in which

the aim is to determine if, and by how much, an asking price exceeds a desired rate of return, as

you can see in Figure 12-6.