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EXCEL NPV FUNCTION
Excel NPV Function Introduction
The NPV Function is within the category of financial functions. It will compute the Net Present Value (NPV) of periodic cash flows. The NPV of an investment will be determined by applying a discount rate and a sequence of future payments and income. The NPV function in financial modelling is important in assessing the value of an investment or analysing the viability of a project. It should be emphasised that analysts should utilise the XNPV function rather than the normal NPV function.
Description of Excel NPV Function
Syntax:
=NPV(rate,value1,[value2],…)
Parameters:
1. Rate (mandatory argument) – This is the discount rate over the term.
2. Value1, Value2 – Value1 is the only choice available. They are numerical numbers that indicate a series of payments and revenue in which:
• Negative payments represent outgoing payments and
• Positive payments represent incoming payments.
Step By Step Guide of NVP Function
Example : The necessary rate of return is 10%. We will use the following formula to compute the NPV:
Key Points
1. Empty cells, logical values, or text representations of numbers, erroneous values, or text that cannot be converted into numbers are disregarded.
2. Only numbers in an array or reference are tallied if an argument is an array or reference. In the array or reference, empty cells, logical values, text, or error values are disregarded.
3. We must input our payment and income values in the correct order, as NPV interprets the order of cash flows using the order of value1, value2,…
4. Values 1, 2,… must be evenly spread in time and appear at the conclusion of each cycle.5. The NPV function and the IRR function are linked (Internal Rate of Return). The IRR is the rate of interest at which the NPV equals zero.
6. The major distinction between the PV function and the NPV function is that the PV function enables cash flows to begin at either the end or the beginning of the period.
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