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NPV Formula

The document discusses compound interest formulas, discounting in Excel, calculating net present value from discounted cash flows, and potential problems with the net present value formula subtracting the first cash flow instead of the initial investment cost.

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Kazi Hasan
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64 views2 pages

NPV Formula

The document discusses compound interest formulas, discounting in Excel, calculating net present value from discounted cash flows, and potential problems with the net present value formula subtracting the first cash flow instead of the initial investment cost.

Uploaded by

Kazi Hasan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Compound interest formula

Tells us how much money we will have tomorrow, given interest rate and time
Money in
Time (years)
Rate (1%)
Money out

20.0
5
1%
21.0

Discounting in Excel
Tells us how much money tomorrow is worth to us today
Money out
Time (years)
Rate (1%)
Money in

60.0
5
10%
37.3

From DCF to NPV


Subtract the cost of the initial investment to get from DCF to NPV
DCF
Initial investment cost
Net present value (NPV)

37.3
20.0
17.3 Correct

Problems with the NPV formula


Subtracts the first cash flow you point it to: whether you want it to or not
a) wrong answer
Discount rate
Cash flows
Use of the NPV formula

10%
t0
t1
t2
t3
t4
-20.0
0.0
0.0
0.0
0.0
15.7 Wrong: NPV formula discounts the first 20m

b) correct answer
Discount rate
Cash flows
Use of the NPV formula
Initial investment cost
NPV

10%
t0
37.3
20.0
17.3 Correct

t1
0.0

t2
0.0

t3
0.0

t4
0.0

t5
60.0
first 20m

t5
60.0

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