What is present value in excel

Formula to Calculate Net Present Value (NPV) in Excel

Net present value (NPV) is a core component of corporate budgeting. It is a comprehensive way to calculate whether a proposed project will be financially viable or not.

The calculation of NPV encompasses many financial topics in one formula: cash flows, the time value of money, the discount rate over the duration of the project (usually the weighted average cost of capital (WAAC)), terminal value, and salvage value.

Key Takeaways

• Net present value (NPV) can help companies determine the financial viability of a potential project.
• It’s especially useful when comparing more than one potential project or investment.
• NPV is an essential tool for corporate budgeting.
• You can use Excel to calculate NPV instead of figuring it manually.
• An NPV of zero or higher forecasts profitability for a project or investment; projects with a negative NPV forecast loss.

Click Play to Learn the Net Present Value Formula

How to Use Net Present Value

To understand NPV in the simplest forms, think about how a project or investment works in terms of money inflow and outflow.

Say, you are contemplating setting up a factory that needs initial funds of $100,000 during the first year. Since this is an investment, it is a cash outflow that can be taken as a net negative value. It is also called an initial outlay.

You expect that after the factory is successfully established in the first year with the initial investment, it will start generating the output (products or services) by the second year and onwards. That will result in net cash inflows in the form of revenues from the sale of the factory output.

The factory generates $100,000 during the second year. That amount increases by $50,000 each year over five years. The actual and expected cash flows of the project are as follows:

Year-A represents actual cash flows while Years-P represent projected cash flows over the mentioned years. A negative value indicates cost or investment, while a positive value represents inflow, revenue, or receipt.

Now, how do you decide whether this project is profitable or not? The challenge is that you are making investments during the first year and realizing the cash flows over a course of many future years.

When multi-year ventures need to be assessed, NPV can assist the financial decision-making, provided the investments, estimates, and projections are accurate.

NPV calculations bring all cash flows (present and future) to a fixed point in time in the present. Hence, the term present value. NPV essentially works by figuring what the expected future cash flows are worth at present. Then, it subtracts the initial investment from that present value to arrive at net present value. If this value is positive, the project may be profitable and viable. If this value is negative, the project may not be profitable and should be avoided.

In the simplest terms:

NPV = (Today’s value of expected future cash flows) – (Today’s value of invested cash)

An NPV of greater than $0 indicates that a project has the potential to generate net profits. An NPV of less than $0 indicates a losing proposition. Usually, NPV is just one metric used along with others by a company to decide whether to invest.

2 Ways to Calculate NPV in Excel

There are two methods to calculate net present value in Excel. You can use the basic formula, calculate the present value of each component for each year individually, and then sum all of them up. Or, you can use Excel’s built-in NPV function.

1. Using Present Value to Calculate NPV

Using the figures from the above example, assume that the project will need an initial outlay of $250,000 in year zero. From the second year (year one) onwards, the project starts generating inflows of $100,000. They increase by $50,000 each year till year five when the project is completed.

The WACC is used by the company as the discount rate when budgeting for a new project. For this project, it’s 10%.

The present value formula is applied to each of the cash flows from year zero to year five. For example, the cash flow of -$250,000 results in the same present value during year zero. Year 1’s inflow of $100,000 during the second year results in a present value of $90,909. Year 2’s inflow of $150,000 is worth $123,967, and so on.

Calculating present value for each of the years and then summing those up produces an NPV of $472,169, as shown above.

2. Using the NPV Function to Calculate NPV

The second Excel method uses the built-in NPV function. It requires the discount rate (again, represented by WACC), and the series of cash flows from year 1 to the last year. Be sure that you don’t include the Year zero cash flow (the initial outlay) in the formula.

The result using the NPV function for the example comes to $722,169. Then, to compute the final NPV, subtract the initial outlay from the value obtained by the NPV function. NPV = $722,169 — $250,000, or, $472,169.

This computed value matches that obtained using the first method.

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While Excel is a great tool for making rapid calculations with precision, errors can occur. Since a simple mistake can lead to incorrect results, it’s important to take care when inputting data.

Pros and Cons of the 2 Methods

Analysts, investors, and economists can use either of the methods, after assessing their pros and cons.

Method 1

Pro

The present value method is preferred by many for financial modeling because its calculation and figures are transparent and easy to audit.

Con

Unfortunately, it requires multiple manual steps. This takes time and has the potential for input errors.

Method 2

Pro

Method Two’s NPV function method can be simpler and involve less effort than Method One.

What’s more, although it assumes unrealistically that all cash flows are received at the end of the year, cash flows can be discounted at mid-year, as needed (the XNPV function can help here). This presents a better view of after-tax cash flows over the course of the year.

Con

On the downside, the initial cash outlay must be netted out manually, a need that can be overlooked by Excel users.

Also, for financial modeling and audit purposes, it’s harder with Method Two than with Method One to determine the calculations, figures used, what’s hardcoded, and what’s input by users.

What Is Net Present Value?

Net present value is the difference between the present value of cash inflows and the present value of cash outflows over a certain period of time. It’s a metric that helps companies foresee whether a project or investment will be profitable. NPV plays an important role in a company’s budgeting process and investment decision-making.

How Do I Interpret NPV?

A net present value of $0 or higher is a good sign. It indicates that a project will be profitable. A net present value that’s less than $0 means a project isn’t financially feasible and perhaps should be avoided.

Can I Calculate NPV Using Excel?

Yes. While you could calculate NPV by hand, you can use an NPV formula in Excel or use the NPV function to get a value more quickly. There’s also an XNPV function that’s more precise when you have various cash flows occurring at different times.

The Bottom Line

Net present value can be very useful to companies for effective corporate budgeting. Excel can also be useful in helping a business calculate NPV.

Whichever Excel method one uses, the result obtained is only as good as the values inserted in the formulas. Therefore, be sure to be as precise as possible when determining the values to be used for cash flow projections before calculating NPV.

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How to calculate present value of annuity in Excel: formula and calculator

by Svetlana Cheusheva, updated on March 13, 2023

Essentially, this tutorial gives answers to three «what» questions. What is present value of annuity? What is the present value formula? What discount or interest rate to use for present value calculation?

If offered a choice to receive a certain sum of money right now or defer the payment into the future, which would you choose? For most people, taking money now is a natural instinct. In the financial world, this is explained by the time value of money concept.

There are two main terms that measure how much the value of money changes over time: future value (FV) and present value (PV). If you are curious to know the worth of your investment after a certain period, calculate its future value as explained in the FV function tutorial. If you wish to find the current worth of money, then you need to calculate present value, and this tutorial shows how to quickly do this in Excel.

Present value of annuity

When putting deposits to a saving account, paying home mortgage and the like, you usually make the same payments at regular intervals, e.g. weekly, monthly, quarterly, or yearly. Such series of payments (either inflow or outflow) made at equal intervals is called an annuity.

The can be defined as the current value of a series of future cash flows, given a specific discount rate, or rate of return. For this reason, present value is sometimes called present discounted value. The bigger the discount rate, the smaller the present value.

The concept of present value (PV) is based on the idea of the time value of money. In essence, any amount you have now is worth more than the same amount in the future due to its capacity to potentially earn interest. The sooner a certain sum is received, the more it is worth. In simple words, this financial concept is described by the old saying: «A dollar today is worth more than a dollar tomorrow».

In financial analysis, present value is highly important. It lets you clearly understand how much money you need to invest today to reach the target amount in the future. Also, it can help you make an informed decision on whether to accept a specific cash rebate, evaluate projects in the capital budgeting, and more.

In everyday life, the present value comes in useful too. For example, it can help you determine which is more profitable — to take a lump sum right now or receive an annuity over a number of years.

Present value formula

When talking about a single cash flow, i.e. one payment period, the present value formula is as simple as this:

• FV — future value
• r — discount or interest rate

Suppose you want to have $11,000 in your saving account one year from now. How much should you deposit today provided that your bank offers an annual interest rate of 10%?

To find the present value of this investment, do this math:

For a series of cash flows, the present value formula is slightly more complicated:

• r – discount or interest rate
• n – the number of time periods
• i – the cash flow period

For example, to find the present value of a series of three $100 payments made at equal intervals and discounted at 10%, you can perform these calculations:

How to calculate present value in Excel — formula examples

The previous section shows how to calculate the present value of annuity manually. The good news is that Microsoft Excel has a special PV function that does all calculations in the background and outputs the final result in a cell.

If you are not familiar with this function, it’s a good idea to begin with the above linked tutorial that explains the syntax.

Present value formula for a single payment

Suppose you have won a cash prize in a lottery and have two options — to get $10,000 right now or $11,000 in a year. Which is a better deal?

To get your answer, you need to calculate the present value of the amount you will receive in the future ($11,000). For this, you need to know the interest rate that would apply if you invested that money today, let’s assume it’s 7%.

With the above information in mind, set up your worksheet as follows:

• Annual interest rate (C2): 7%
• No. of years (C3): 1
• Future value (C4): 11,000

The formula to calculate the present value of the investment is:

Please pay attention that the 3 rd argument intended for a periodic payment (pmt) is omitted because our PV calculation only includes the future value (fv), which is the 4 th argument.

Also, please note that the returned present value is negative, since it represents a presumed investment, which is an outflow. In other words, if you invested $10,280 at 7% now, you would get $11,000 in a year.

Getting back to the initial question — receiving $11,000 one year from now is a better choice, as its present value ($10,280) is greater than the amount you are offered right now ($10,000).

In the above example, an interest rate is compounded yearly. However, most savings accounts pay monthly compound interest. Will it impact the calculation? Let’s see…

Because the interest is compounded 12 times a year, we divide 7% by 12 to get the correct periodic rate, and multiply 1 by 12 to have the right nper:

As you can see below, with an interest rate compounded monthly, the present value is much smaller, which totally changes the answer to the original question 🙂

Note. These examples assume ordinary annuity when all the payments are made at the end of a period. For annuity due, please see this example.

Present value formula for annuity

When calculating the present value of annuity, i.e. a series of even cash flows, the key point is to be consistent with rate and nper supplied to a PV formula.

To get a correct periodic interest rate (rate), divide an annual interest rate by the number of compounding periods per year:

• Monthly: rate = annual interest rate / 12
• Quarterly: rate = annual interest rate / 4
• Semiannual: rate = annual interest rate / 2

To get the total number of periods (nper), multiply the length of an annuity in years by the number of periods per year:

• Monthly: nper = no. of years * 12
• Quarterly: nper = no. of years * 4
• Semiannual: nper = no. of years * 2

For this example, we will be using a series of $100 payments that we calculated manually in the first part of this tutorial and input the following data in a worksheet:

• Annual interest rate (B2): 10%
• No. of years (B3): 3
• Annual payment (B4): -100

Please notice that the payment is expressed by a negative number because it’s an outflow.

Assuming the payments are made at the end of each year, you can calculate the present value with this formula:

As shown in the image below, the PV formula returns the same result as the manual calculation — $248.69.

If the payments are made monthly, then add one more input cell (B5) for the number of periods per year (12 on our case). To get the correct present value, convert an annual interest rate to a monthly rate (B2/B5) and provide the total number of periods for annuity (B3*B5):

=PV(B2/B5, B3*B5, B4)

Present value formula for different annuity types

The annuity type is controlled by the 5 th (optional) argument of the PV function, named type:

• For ordinary (regular) annuity, where all payments are made at the end of a period, use 0 for type. This is the default value that applies automatically when the argument is omitted.
• For annuity due, where all payments are made at the end of a period, use 1 for type.

To see the effect of different annuity types, set up your spreadsheet like shown below and enter your data in the corresponding cells:

• Annual interest rate: B2
• No. of years: B3
• Payment amount: B4
• Annuity type: B5
• Periods per year: B6

For regular annuity, type 0 in B5; for annuity due, type 1. To prevent mistakes, it makes sense to create a drop-down list for B5 that only allows 0 and 1 values.

To calculate the present value of a series of payments, we will be using the below formula. Please pay attention that the 4 th argument (fv) is omitted because the future value is not included in the calculation.

=PV(B2/B6, B3*B6, B4, ,B5)

As shown in the screenshot below, the annuity type does make the difference. With the same term, interest rate and payment amount, the present value for annuity due is higher.

How to create present value calculator in Excel

Knowing how to write a PV formula for a specific case, it’s quite easy to tweak it to handle all possible cases. Simply provide input cells for all the arguments of the PV function. If some argument is not used in a particular calculation, the user will leave that cell blank.

In our case, we organize the data as follows:

• Annual interest rate: B2
• Annuity term in years: B3
• Payment amount: B4
• Future value: B5
• Annuity type: B6
• Periods per year: B7

The present value calculator formula in B9 is:

=PV(B2/B7, B3*B7, B4, B5, B6)

Assuming you make a series of $500 payments at the beginning of each quarter for 3 years with a 7% annual interest rate, set up the source data as shown in the image below. And the present value calculator will output the result:

For the PV calculator to work correctly, please follow these usage notes:

• For a lump sum investment that will pay a certain amount in the future, define the future value (B5). For an annuity spread out over a number of years, specify the periodic payment (B4).
• Any money that you pay out should be represented by a negative number; any money that you receive — by a positive number.
• The Periods per year cell (B7) must not be blank or 0 because this will cause a #DIV/0 error. In case of annual cash flows, enter 1 in that cell.

I hope our examples have shed some light on how to how to calculate present value of annuity in Excel. Thank you for reading and hope to see you on our blog next week!

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