Net Present Value

Calculating financial solutions

Many people as well as companies outsource all their financial work as they do not have the tools or expertise to do it self. However with the endless list of financial functions from Excel, with the help of the function wizard you will soon be able to determine net present value, internal rate of return and numerous other things. The NPV function in Excel is a function that returns the net present value of an investment and can be a very useful financial tool. The net present value is calculated by using a discount rate and a series of negative numbers, future payments, and positive numbers, income.

How to use the net present value function:

Firstly in order to calculate the net present value of a series of cash flows; you will require a series of numbers that represents a cash flow, these numbers do not need to be equal in amount but are required to be equally spaced in time. Click on the cell where you would like the answer from the function to appear, then click on the fx button on the Excel toolbar to activate the function wizard. A dialog box will appear, select the financial category and then select the NPV – net present value function from the list that appears. A dialog box will appear for the function arguments for the net present value function, here you will be required to fill in the arguments. Here you will have to fill in the Rate; this is the rate of discount over the length of one period for which you are calculating the net present value.

Then you will be required to fill in the Value: this is from value one up to value 29 if you have so many values. What you need to remember when determining the net present value of a series of cash flows is that if you have an initial investment this will occur at the beginning of period one but will be known as period zero. However if you add this number in with the other cash flow numbers Excel will assume that the initial number occurred at the end of period one and you will get an inaccurate result. You should also make sure that the periods of time for which the numbers represent are the same throughout the series. To select the cells for the Value argument you can select the first cell that represents the first period, not period zero, and drag till the last cell of the series. Excel will automatically fill in these values in the net present value function dialog box. Now click OK. Excel will automatically substitute the correct answer into the initial cell that was clicked before activating the net present value function.

It is important to remember that if you have a initial investment value for your series of cash flows, the initial investment should be subtracted from the net present value as calculated by Excel. The answer that is supplied by Excel is an accurate answer however it is only true from period one and not from period zero.

To learn more about the net present value function and other financial functions available from Excel for your convenience contact Audit Excel.