Using the Excel NPV Function
SummaryThe NPV function is one of Excel's financial functions and returns the net present value of an investment using a discount rate and a series of future payments and income. The NPV function is related to the IRR function as IRR can be defined as the rate at which NPV equals zero (0).
Payments should be entered as negative numbers and income should be entered as positive numbers.
Syntax=NPV (rate, value1, [value2], ...)
Required. Discount rate used in a period. The rate is the discount rate for one period and assumed to be annually.
Required. A value representing payments and income.
Value2 and subsequent values are optional. The NPV function can handle up to 254 arguments.
Value1, Value2, and subsequent values must be entered in equal time intervals and occur at the end of each period.
It is important to enter the value arguments in the correct order as the function uses the order to interpret the order of cash flows.
The NPV function will ignore text and logical values as well as empty cells.
Usage NotesNPV returns the net present value of an investment using future cash flows and a discount rate.
NPV in Excel
The "net" portion of the NPV function can be a bit misleading. NPV is defined as the present value of expected, future cash flows less the initial investment cost. In Excel, NPV is simply the present value of uneven cash flows.
To produce a more accurate NPV result, try excluding the initial investment from the values argument. Rather, subtract this investment outside the NPV function. For example:
NPV vs PV
The net present value and present value functions are similar, but have a few differences worth noting. Primarily, the PV function accepts cash flows that begin at either the end or the beginning of the period. NPV requires all cash flows to begin at the end of the period.
Another difference is that NPV can handle variable cash flows, whereas PV cash flows must be constant throughout the investment period.