How to Calculate Net Present Value (NPV) in Excel?

Modified on Wed, 20 Jun 2018 at 09:55 AM

A sum of money is not the same from one period to the other in time. For example, if you won $500 in the lottery 50 years ago you would have been richer than if you had won it yesterday. This rule reflects the power of accumulated interest.

To evaluate the profitability of an investment project, you may use net present value (NPV). NPV is the calculation of the net cash input that a project should obtain in today's dollars, considering the value of money over time. Although it is possible to calculate NPV with conventional mathematical functions, Excel has a dedicated function to calculate NPV.

How to Calculate NPV Using Excel

To calculate the NPV of an investment project, you must consider the present value of all cash receipts and all cash disbursements related to the project. Generally, if the result is greater than zero dollars, we should accept the project. Otherwise, we should choose to drop it. In other words, realizing a project with an NPV greater than zero dollars will add to a company's value.

The choice of a discount rate is usually linked to the level of risk for the project. If the project is equivalent to the average risk of the company, we can use the weighted average cost of business capital.

Source : Investopedia

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