Financial Function | How to use Excel NPV Function?

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In the previous post we saw “Excel Function | What is the Difference Between COUNT and COUNTA?”, now we will see ‘how to use the Excel NPV function’?

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How to Find Financial Function in excel?

To find financial function in excel open excel and click on the “Blank” to open a blank excel worksheet now click on the ‘Formula Tab’ and under ‘Function Library’ click on the ‘Financial’ option as shown below:

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What is NPV Function?

NPV stands for Net Present Value. It Calculates the net present value of an investment by using a discount rate and a series of future payments (negative values) and income (positive values).

NPV Function is used to calculate the present values of all future cash flows. It is highly useful in project analysis.

NPV for a project is calculated (based on its forecasted cashflows) using a rate of discounting (usually the cost of capital).

If the NPV is positive, the project is accepted else it is rejected

Syntax

NPV(rate,value1,[value2],…)

Arguments

The arguments of NPV are rate and values.

Rate    Required. The rate of discount over the length of one period.

Value1, value2, …    Value1 is required, subsequent values are optional. 1 to 254 arguments representing the payments and income.

Rate is the rate of discounting. Values are various cash flows occurring in the future, starting from period 1.

Therefore, if we wish to calculate the net present value of a project, we must include the future cashflows inside the function and we should subtract the initial cash outflow from it.

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Understand With Example

Let’s see with the help of example

In the above example, the initial cash outflow is Rs. 1,50,000. Subsequent cashflows, as expected in the future, are laid down further.

Type ‘=’ and Insert NPV function and select the rate as 10% from cell ‘D11’. Then specify the range of values as C6 to C9, covering the future cashflows. Do not include the initial cash flow at this stage. Then close the function and thereafter, add the initial cashflow. Since the initial cashflow is entered as a negative figure, it reduces the present value of future cash flows and returns the NPV.

In the next post we will explore more financial functions in excel.

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