How to Calculate Net Present Value using Excel:

The calculation of net present value is useful 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 on 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.

Example:

Consider the following example to understand how NPV function works.

Suppose a company AtlanticWorld 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.