Net Present Value (NPV) is a useful investment analysis technique which helps the management greatly in making informed decisions. Manual exercise of calculating NPV takes a time but thanks to Microsoft Excel that it can be done within a minutes.
Things to require
In order to calculate NPV using Excel formula is easy. For this, we need things as follows:
Formula
= NPV(discount rate, cash flow year 1, cash flow year 2, cash flow year 3, ...) + initial investment
Example
ABC CFO is evaluating the project with the following cash flows:
Year |
0 |
1 |
2 |
3 |
4 |
5 |
Cash Flows |
(10,000) |
2,500 |
2,000 |
3,000 |
5,000 |
4,500 |
Discount rate |
10% |
|||||
NPV |
2,389 |
We have used the following formula to calculate the NPV:
=NPV(C7,D5,E5,F5,G5,H5)+C5
C7 contains discount rate, while cell D5 to H5 contain annual cash flows. C5 contains initial investment at the time of starting the project.