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Transcripts for the above video clip:
NPV PROJECT
This
segment will show you how to determine the NET PRESENT VALUE (NPV)
of a series of cash flows.
In this example we have a series of cash flows starting at the
beginning of Period 1, which we called Period 0. An outflow of 20
000, and then the next five years we have inflows of cash.
We would like to determine what the NET PRESENT VALUE is of these
series of cash flows. In order to do this we can make use of the NET
PRESENT VALUE function.
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if we click on the cell
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and go the Function Wizard
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go into the Financial categories
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and find the NPV function
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This will appear, we are asked to fill it in.
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The first criteria is to give it a Rate, which is a
rate of discount over the length of one period. In this case it’s
this cell here,
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we now need to enter the Values and if you click on
the first one you’ll see that it tells you here its Value 1, 2 all
the way up to 29 of income, equally space in time and occurring at
the end of each period.
Now this is very, very important because if you look at our numbers,
Period 0 is actually the beginning of Period 1 and then Period 1
that’s the end, the end, the end.
If we assume the values of all these cells we’ll be incorrect
because Excel will assume that this 20 000 investment actually
occurs at the end of Period 1. So in order to do this is our Value 1
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we highlight all cash flows that happen at the end
of the period
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and when we push Ok
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you’ll see we get a NET PRESENT VALUE
However we have to be very careful because what we’ve told it to do,
is give us the NET PRESENT VALUE of all the cash flows at the end of
the years. We have excluded this, now because it happens at the
beginning of Period 1 we don’t have to worry about present valuing
it because the number is already present values.
So in order to get an accurate NET PRESENT VALUE, you need to
subtract the initial investment.
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so you’ll see we’ve got a cell here for Initial
Investment,
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you make that, equal to the beginning period
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when we push enter
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you’ll see I’ve summed these two,
so the NET
PRESENT VALUE of these series of cash flows is actually this number
here.
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