How to Calculate Net Present Value using Excel?

The calculation of net present value is used when a business has to identify a viable investment opportunity. There are many ways to calculate the NPV. The simplest way is:                 

By Use of NPV function in Excel:

The NPV function consists of the following arguments:

=NPV (Rate, FCF ₁, FCF ₂………… FCF _n)

 

This function gives the NPV of an investment based on a discount rate and a series of cash outflows (future payments) and cash inflows (income).  

The calculation of NPV is based on expected future cash flows of a project. For example, if cash flows occur at the beginning of the period, the first value should be added to the NPV result, should not include in the values arguments.

NPV Example:

Consider the following example to understand how NPV function works.

Suppose a company Atlantic World Co. is considering an investment in a machine that costs $150,000 and the additional cash inflows from the machine will be $80,000, $ 50,500, and $76,600 over the next three years.   The firm’s cost of capital is 12%.

Consider the following example to understand how NPV function works.

DATA (A)                              DESCRIPTION (B)

 1          12%                            Annual Discount Rate (Cost of Capital)

 2      (150,000)                        Initial Cost of Investment

 3        80,000                           Return from First Year

 4        50,500                           Return from second Year

  5      76,600                            Return from Third Year

FORMULA                             

=NPV(A1,A2,A3,A4,A5)

=14,472.53                             

Net Present Value of the Investment is $14,472.53

 As NPV of the purposed investment is positive so the company should invest in the machine.