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# 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.

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