{"id":6614,"date":"2021-12-07T22:15:59","date_gmt":"2021-12-07T21:15:59","guid":{"rendered":"https:\/\/www.simtrade.fr\/blog_simtrade\/?p=6614"},"modified":"2025-09-04T15:24:05","modified_gmt":"2025-09-04T15:24:05","slug":"compute-net-present-value-investment-excel","status":"publish","type":"post","link":"https:\/\/www.simtrade.fr\/blog_simtrade\/compute-net-present-value-investment-excel\/","title":{"rendered":"How to compute the net present value of an investment in Excel"},"content":{"rendered":"

\"Maite<\/a><\/p>\n

In this article, Maite CARNICERO MARTINEZ<\/a> (ESSEC Business School, Global Bachelor of Business Administration, 2021-2022, exchange student from the University of Salamanca) explains how to compute the net present value of an investment in Excel.<\/p>\n

When the time comes that one must choose what project to embark on, there are several measures to compare the available options, such as the internal rate of return, the payback method and the net present value (also known as the \u201cdiscounted cash flow\u201d method or DCF). In this article, I will focus on the last one of these tools, which is the preferred by most financial analysts.<\/p>\n

A project is a temporary, unique and progressive endeavor to produce a tangible or intangible result, for instance, a new product or a competitive advantage. It normally entails the execution of some tasks over a period of time, conditioned to limitations related to cost, quality or performance. During its implementation, an initial investment and a series of cash flows are to be generated at different times. Some examples of projects are: developing a new service, building a factory, and implementing a new process.<\/p>\n

The Net Present Value (NPV) compares the present value of the future cash flows with the investment made at the beginning. The computation of the present value uses a the required rate of return. It takes into account the time value of money, translating future cash flows into today\u2019s value, since the buying power of money today is greater that the buying power of the same amount in the future.<\/p>\n

The NPV is the basis of the discounted cash flow model (DCF) which allows investors to compare the initial cash flow of expenditure against the present value of future cash flows. It could be used to evaluate whether an important investment is worthwhile, but also in mergers and acquisitions and to compare companies, like Warren Buffet does, because once we have calculated the different NPVs we will know which investment has the biggest gain.<\/p>\n

To sum up, the NPV allows us to do evaluate investments from a financial point of view and select the best one.<\/p>\n

Modelling of an investment<\/h2>\n

How can we calculate it?<\/p>\n

The mathematical formula for the NPV is given by:<\/p>\n

\"NPV<\/center><\/p>\n

CFt<\/sub> = cash flows of each period (from t=0 to t=T)
\nT = number of periods
\nr = discount rate or interested rate required of the investment. It is the rate of return that the investors expect on their investment<\/p>\n

For a classical<\/i> project, the first cash flow, CF0<\/sub>, is negative and corresponds to the initial cost of the project and the following cash flows, CFt<\/sub> for t=1 to t=T, are assumed to be positive. The NPV can be rewritten as<\/p>\n

\"NPV<\/center><\/p>\n

This formula clearly shows that the NPV compares the first cash flow on the one hand, and the present value of future cash flows on the other hand. As the initial cash flow is negative and the present value of future cash flows is positive, the sign of the NPV depends on relative weight of these two components.<\/p>\n

Investment decision<\/h2>\n

The NPV can be used as a criterion for the investment decision.<\/p>\n