NPV Formula

Learn how Net Present Value works

Written by CFI Team

Read Time 3 minutes

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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.).

Below is an illustration of the NPV formula for a single cash flow.

Present Value = Cash Flow / (1+i)ⁿ

Where:

i = Discount rate
n = Period number

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:

Source: 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.

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 or with a calculator; instead, they use Excel.

=NPV(discount rate, series of cash flow)

Example of how to use the NPV function:

Set a discount rate in a cell.
Establish a series of cash flows (must be in consecutive cells).
Type “=NPV(“ and select the discount rate “,” then select the cash flow cells and “)”. (See screenshots below).

Congratulations, you have now calculated net present value in Excel!

Download the free template.

Screenshot of NPV Function in Excel

NPV Calculation in Excel

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 the regular function.

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

Video Explanation of the NPV Formula

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 models an analyst will forecast a company’s three financial statements into the future and calculate the company’s Free Cash Flow to the Firm (FCFF).

Additionally, a terminal value is calculated at the end of the forecast period. Each of the cash flows in the forecast and terminal value is then discounted back to the present using a hurdle rate of the firm’s weighted average cost of capital (WACC).

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

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:

Additional Resources

CFI is a global provider of financial modeling courses and of the FMVA Certification. CFI’s mission is to help all professionals improve their technical skills. If you are a student or looking for a career change, the CFI website has many free resources to help you jumpstart your Career in Finance. If you are seeking to improve your technical skills, check out some of our most popular courses. Below are some additional resources for you to further explore:

The Financial Modeling Certification

Analyst Certification FMVA® Program

The Financial Modeling Certification

Below is a break down of subject weightings in the FMVA® financial analyst program. As you can see there is a heavy focus on financial modeling, finance, Excel, business valuation, budgeting/forecasting, PowerPoint presentations, accounting and business strategy.

A well rounded financial analyst possesses all of the above skills!

Additional Questions & Answers

CFI is the global institution behind the financial modeling and valuation analyst FMVA® Designation. CFI is on a mission to enable anyone to be a great financial analyst and have a great career path. In order to help you advance your career, CFI has compiled many resources to assist you along the path.

In order to become a great financial analyst, here are some more questions and answers for you to discover: