Net present value with NPV
PremiumIn E2, work out the project's net present value at the rate in E1. NPV discounts every value it gets, so give it years 1 to 4 and add the year 0 investment after: NPV(E1,B3:B6)+B2.
| A | B | C | D | E | F | |
|---|---|---|---|---|---|---|
| 1 | Year | Cash flow | Discount rate | 0.08 | ||
| 2 | 0 | -10000 | Net present value | |||
| 3 | 1 | 3000 | ||||
| 4 | 2 | 4000 | ||||
| 5 | 3 | 4000 | ||||
| 6 | 4 | 3000 | ||||
| 7 | ||||||
| 8 |
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Why this works
NPV turns each year's cash flow into today's money by dividing it by 1.08 once per year: 3,000 in year 1 is worth 2,777.78 today. Years 1 to 4 are worth 11,587.55 in total. The 10,000 in year 0 is already in today's money, so it's added without discounting. The NPV is 1,587.55: above zero, so at 8% the project pays off.
Common mistake: Giving NPV the whole column from year 0. Excel's NPV assumes the first value comes a year from now, so the investment gets discounted too and the answer is too low.
The answer
- E2
=NPV(E1,B3:B6)+B2