Next Generation Excel: Modeling In Excel For Analysts And MBAs (For MS Windows And Mac OS), 2nd Edition

Chapter 29

NPV and IRR—Evaluating Capital Investments

Financial functions in Excel are used to evaluate the financial profitability and effectiveness of investment projects. Most financial procedures involve several payments over the course of carrying out a project, rather than a single payment at a specific point. Using the Time Value of Money functions allows you to compare these projects to each other. For example, when financing an asset, the investor will receive future cash flows at different dates in the future. Excel allows you to calculate these financial indicators of investments (NPV—Net Present Value, FV—Future Value, IRR—Internal Rate of Return), which makes it possible to choose the most favorable and gainful investment.

THE TIME VALUE OF MONEY

NPV—Net Present Value

Net Present Value is an approach/procedure used in long-term capital investment budgeting, where the present value of cash inflows is subtracted from the present value of cash outflows. In other words: The process of calculating the value of an investment by adding the present value of expected future cash flows to the initial cost of the investment. NPV is used to analyze the profitability of an investment/project. NPV compares the value of a dollar today versus the value of that same dollar in the future, taking inflation and return into account. When the NPV of a project is positive, it should be accepted. When it is negative, the project should be rejected because cash flows will be negative.

Calculating ...