NPV Formula

Learn how NPV really works

What is the NPV formula?

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.).

Here is an illustration of the NPV formula for an individual cash flow.

NPV formula

Screenshot of CFI’s Corporate Finance 101 Course.

 

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 flows, 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:

NPV formula for a series of cash flows

Souce: CFI’s Free Corporate Finance Course.

What is the math behind the NPV formula?

Here is the mathematical formula for calculating the present value of an individual cash flow.

Where,

PV = Present Value
F = Future payment (cash flow)
r = Discount rate
n = the number of periods in the future the cash flow is

PV = F / [ (1 + r)^n ]

 

Valuation Techniques

Learn the most important valuation techniques in CFI's Business Valuation course!Step by step instruction on how the professionals on Wall Street value a company. 

 

Learn valuation the easy way with templates and step by step instruction!

 

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 the NPV in Excel!

Download the free template.

 

NPV function in Excel

 

 

NPV Excel formula

Source: CFI’s Free Excel Crash Course.

 

If you need to be very precise in your calculation, it’s highly recommended to use XNPV instead of NPV.

To find out why, read CFI’s guide to XNPV vs NPV in Excel.

 

DCF Modeling

The main use of the NPV formula is in Discounted Cash Flow (DCF) modeling in Excel.  In DCF models an analyst will forecast a company’s three financial statements into the future and calculate its Free Cash Flow to the Firm (FCFF).

Below is an example of a DCF model from one of CFI’s courses.

 

DCF financial modeling guide

Screenshot: CFI financial modeling courses.

 

More helpful resources

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: