The NPV formula is a way of calculating the Net Present Value (NPV) of a series of cash flows based on a specified discount rate. The NPV formula can be very useful for financial analysis and financial modeling when determining the value of an investment (a company, a project, a cost-saving initiative, etc.).
Below is an illustration of the NPV formula for a single cash flowCash FlowCash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has. In finance, it is used to describe the amount of cash (currency).
Corporate Finance FundamentalsThis free Introduction to Corporate Finance Course is perfect for anyone in or starting a career in investment banking, equity research, and accounting.
Screenshot of CFI’s Corporate Finance 101 CourseCorporate Finance FundamentalsThis free Introduction to Corporate Finance Course is perfect for anyone in or starting a career in investment banking, equity research, and accounting..
NPV for a Series of Cash Flows
In most cases, a financial analyst needs to calculate the net present value of a series of cash flowsForecasting Cash FlowThis article on forecasting cash flow is the last part of the four-step financial forecasting model in Excel., not just one individual cash flow. The formula works in the same way, however, each cash flow has to be discounted individually, and then all of them are added together.
Here is an illustration of a series of cash flows being discounted:
Corporate Finance FundamentalsThis free Introduction to Corporate Finance Course is perfect for anyone in or starting a career in investment banking, equity research, and accounting.
Source: CFI’s Free Corporate Finance CourseCorporate Finance FundamentalsThis free Introduction to Corporate Finance Course is perfect for anyone in or starting a career in investment banking, equity research, and accounting..
What is the Math Behind the NPV Formula?
Here is the mathematical formula for calculating the present value of an individual cash flow.
NPV = F / [ (1 + i)^n ]
Where,
PV = Present Value
F = Future payment (cash flow)
i = Discount rate (or interest rate)
n = the number of periods in the future the cash flow is
How to Use the NPV Formula in Excel
Most financial analysts never calculate the net present value by hand nor with a calculator, instead, they use Excel.
=NPV(discount rate, series of cash flow)
(See screenshots below)
Example of how to use the NPV function:
Step 1: Set a discount rate in a cell.
Step 2: Establish a series of cash flows (must be in consecutive cells).
Step 3: Type “=NPV(“ and select the discount rate “,” then select the cash flow cells and “)”.
Congratulations, you have now calculated net present value in Excel!
Source: CFI’s Free Excel Crash CourseExcel Fundamentals - Formulas for FinanceAre you looking for an Excel Crash Course? Get Free Excel Training for a career in corporate finance and investment banking from the Corporate Finance Institute..
If you need to be very precise in your calculation, it’s highly recommended to use XNPV instead of the regular function.
Below is a short video explanation of how the formula works, including a detailed example with an illustration of how future cash flows become discounted back to the present.
DCF Modeling
The main use of the NPV formula is in Discounted Cash Flow (DCF) modeling in Excel. In DCF modelsDCF Model Training Free GuideA DCF model is a specific type of financial model used to value a business. The model is simply a forecast of a company’s unlevered free cash flow an analyst will forecast a company’s three financial statementsThree Financial StatementsThe three financial statements are the income statement, the balance sheet, and the statement of cash flows. These three core statements are into the future and calculate the company’s Free Cash Flow to the FirmValuationFree valuation guides to learn the most important concepts at your own pace. These articles will teach you business valuation best practices and how to value a company using comparable company analysis, discounted cash flow (DCF) modeling, and precedent transactions, as used in investment banking, equity research, (FCFF). Additionally, a terminal valueTerminal ValueTerminal Value (TV) is the estimated present value of a business beyond the explicit forecast period. TV is used in various financial tools is calculated at the end of the forecast period. Each of the cash flows in the forecast and terminal value are then discounted back to the present using a hurdle rateHurdle Rate DefinitionA hurdle rate, which is also known as minimum acceptable rate of return (MARR), is the minimum required rate of return or target rate that investors are expecting to receive on an investment. The rate is determined by assessing the cost of capital, risks involved, current opportunities in business expansion, rates of return for similar investments, and other factors of the firm’s weighted average cost of capital (WACCWACCWACC is a firm’s Weighted Average Cost of Capital and represents its blended cost of capital including equity and debt.).
Thank you for reading this guide to calculating net present value. CFI’s mission is to help anyone become a world-class financial analyst. To keep learning and advancing your career, these additional financial resources will be a big help:
Walk me through a DCF modelWalk Me Through a DCFThe question, walk me Through a DCF analysis is common in investment banking interviews. Learn how to ace the question with CFI's detailed answer guide.
Valuation methodsValuation MethodsWhen valuing a company as a going concern there are three main valuation methods used: DCF analysis, comparable companies, and precedent transactions
DCF modeling guideDCF Model Training Free GuideA DCF model is a specific type of financial model used to value a business. The model is simply a forecast of a company’s unlevered free cash flow
