How to Use the NPV Function in Microsoft Excel
Capital budgeting refers to the process of evaluating specific investment decisions. Financial managers must be familiar with the different capital budgeting decision rules when analyzing projects and deciding which ones to keep in the capital budget. One of these rules is the NPV (net present value) method. The equation for NPV is hard to type on a keyboard. Trying to figure out the NPV of a project by hand by plugging numbers into the equation is quite cumbersome and can cause errors. Certain financial and graphing calculators can he used to calculate a project's NPV, but you can easily find this value by using a computer spreadsheet program. Use the built-in NPV function in Microsoft Excel to determine a project's NPV to see if it should be accepted or rejected.
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Instructions
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1
Start Microsoft Excel. You can do this by clicking on the Start button and typing Excel into the text box, or by double-clicking the Microsoft Excel icon on your computer's desktop.
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2
Enter cash-flow data. Substitute your own values for the following example values. Starting with cell A1 and ending with cell A5, type the following numbers:
0,1,2,3,4
Starting with cell B1 and ending with cell B5, type the following dollar amounts:
-$1,000, $500, $400, $300, $100
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3
In cell A7, enter the discount rate. This is the interest rate used to determine the present value of future cash flows. For this example, type .10, the decimal rendering of 10 percent.
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4
Click on cell A9. At the top of the screen, click on Insert and then click on Function. Type NPV in the "Search for a function" box and click "Go." Alternatively, select Financial in the "Or select a category" drop-down menu, scroll down, click on NPV, and click OK.
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A pop-up window asks you to input the rate and cash flows. In the Rate box, type .10, which is the discount rate. In the Value1 box, enter the first cash inflow, which is 500.00. In the Value2 box, enter the second cash inflow, which is 400. In the Value3 box, enter the third cash inflow, which is 300. In the Value4 box, enter the fourth cash inflow, 100. You can omit the dollar signs if you choose.
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6
Click OK or hit enter on your keyboard. The resulting figure is $1,078.82.
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7
Account for the initial cash outflow of $1,000. Subtract $1,000 from the amount you obtained in Step 6. Do this in the same cell, A9. You get $78.82, which is the net present value (NPV) of the project. Since the NPV is positive, the project should be accepted. If the NPV turned out to be negative, the project would be rejected.
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Tips & Warnings
Make sure to use proper syntax when working with Excel formulas.
References
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