NPV
Calculates the net present value of an investment using a discount rate and a series of future cash flows (income and expenses).
NPV(rate, value1, [value2], ...)Arguments
rateDiscount rate per periodvalue1First cash flow (at end of period 1)value2Additional cash flows(optional)
=NPV(10%, -5000, 2000, 2500, 3000)NPV of project costing $5K with 3 years of returns at 10% discount
=NPV(8%, 1000, 1000, 1000)+(-3000)NPV of $3K investment with $1K annual return for 3 years
- •Positive NPV means the investment is profitable
- •Initial investment at time 0 should be added separately (not in the NPV range)
- •Use consistent time periods for rate and cash flows
- •Forgetting that NPV assumes the first cash flow occurs one period from now, not immediately - an initial investment made today (period 0) needs to be added separately outside the NPV function, not included in its argument list
- •Mixing signs incorrectly across the cash flow series - outflows (investments, costs) should be negative and inflows (returns) positive, and getting this backward flips the sign of the entire result
- •Using a rate that doesn't match the periodicity of the cash flows - an annual discount rate must be paired with annual cash flows, not monthly ones, or the result will be meaningless
IRRFinds the discount rate that makes NPV equal to zero, rather than calculating NPV at a fixed rate.PVHandles a single amount or a series of identical payments, while NPV handles a series of potentially different cash flow amounts.XNPVAccounts for irregular time intervals between cash flows, rather than NPV's assumption of equally spaced periods.Why do I need to add the initial investment separately from NPV?
NPV assumes its first listed cash flow happens one period from now, not at time zero. Since an initial investment typically happens immediately, it should be subtracted outside the function, like =NPV(rate,cashflows)-initial_investment.
Should cash outflows be negative in NPV?
Yes, investments and costs should be entered as negative numbers and returns as positive - consistent sign convention throughout the series is essential for a correct result.
Can NPV handle cash flows at irregular intervals?
No, NPV assumes all cash flows are equally spaced. Use XNPV instead when payment dates aren't evenly spaced.
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