What is NPV (Net Present Value)?

NPV is a financial metric used to evaluate the profitability of an investment or project. It calculates the present value of future cash flows minus the initial investment.

In Excel, you can use the NPV function to calculate this.

NPV Formula in Excel:

=NPV(rate, value1, [value2], ...) - initial_investment

• rate: The discount rate (interest rate or required rate of return).

• value1, value2, ...: Future cash flows (typically not including the initial investment).

• initial_investment: Subtracted after calculating present value of future cash flows.

💡 Example:

Let’s say you’re evaluating a project with the following details:

• Discount Rate: 10%

• Initial Investment: $5,000

• Expected Cash Flows for 4 years:

  • Year 1: $1,500

  • Year 2: $2,000

  • Year 3: $2,000

  • Year 4: $1,000

Excel Table:

Year Cash Flow

B1 -5000

B2 1500

B3 2000

B4 2000

B5 1000

Excel Formula:

If cash flows from Year 1 to Year 4 are in cells B2:B5, and the discount rate is 10%, the formula would be:

=NPV(10%, B2:B5) – 5000

💡 Note: 10% can be written as 0.10, or refer to a cell like A1 that contains 0.10.