In this guide we will consider how to model a net present value (“NPV”). We will also consider the Excel functions available that are specific to calculating an NPV.
2. ABOUT THE FINANCIAL MODELLING HANDBOOK
Financial modelling should be collaborative. Collaboration reduces error, speeds up development time and lowers cost. The Financial Modelling Handbook is a collaborative, crowd-sourced guide to building better financial models using the FAST Standard.
www.financialmodellinghandbook.com/contribute
3. financialmodellinghandbook.com
KOMAL
Komal Aggarwal is a Financial Modeller with F1F9.
She has worked on Oil & Gas, mining and energy sector projects.
She is fond of adventure sports.
Financial Modelling
HANDBOOK
4. In this guide we will consider how to model a net present value (“NPV”). We will also consider the Excel functions available that are specific to calculating an NPV.
financialmodellinghandbook.com
Financial Modelling
DOWNLOAD THIS GUIDE AND THE ACCOMPANYING EXCEL EXAMPLE
HANDBOOK
NET PRESENT
How to model
VALUE
5. financialmodellinghandbook.com
Financial Modelling
HANDBOOK
HOW TO CALCULATE NPV
To calculate an NPV, we need the following information:
A valuation date
Cash flows
Timing of cash flows; and
A percentage rate of return.
1
2
3
4
6. financialmodellinghandbook.com
Financial Modelling
HANDBOOK
CALCULATION OF YEARS FROM PV DATE
First, let’s calculate how far each of the cash flows is from the valuation date.
By subtracting one date from another, Excel will calculate the number of days between two dates. So 2 January 2001 minus 1 January 2001 is one day.
We can then express that as a proportion of number of days in a year.
The formula in cell K13 is (K12 - $F10) / $F11.
7. financialmodellinghandbook.com
Financial Modelling
HANDBOOK
CALCULATING DISCOUNT FACTOR
Now let’s calculate a discount factor. The formula in cell J17 is 1 / (1 + $F15) ^ J16.
Note that both discount rate and the timing assumptions are expressed in years. It is important that both are expressed using the same time period.
8. financialmodellinghandbook.com
Financial Modelling
HANDBOOK
CALCULATING PRESENT VALUE OF CASH FLOWS
Calculate the present value of cash flows by multiplying a cash flow with its respective discount factor.
The formula in cell L22 is L20 * L21.
9. financialmodellinghandbook.com
Financial Modelling
HANDBOOK
CALCULATING NET PRESENT VALUE
Having calculated a series of present values, we can add them up to arrive at a single NPV.
The formula in cell F23 is SUM(J22:X22).
10. financialmodellinghandbook.com
Financial Modelling
HANDBOOK
EXCEL IN-BUILT FUNCTION - NPV
NPV function The syntax of = NPV() is “(rate, value1, value2,…)”. This function takes the discount rate and a stream of cash flow values and calculates an NPV. Things to note: It is a black box function: a user has no idea whether the answer is right or wrong. The valuation date is not made explicit – and it is not possible to choose a valuation date. = NPV() assumes that the first cash flow occurs one period after the valuation date (at the end of the first period). Cash flows are assumed to occur at equal intervals. = NPV() does not consider the actual number of days between cash flow dates.
11. financialmodellinghandbook.com
Financial Modelling
HANDBOOK
EXCEL IN-BUILT FUNCTION - XNPV
XNPV function The syntax of = XNPV() is “(rate, values, dates)”. This function takes a discount rate, a range of cash flows and a range of dates at which each cash flow occurs. Things to note: It is a black box function: a user has no idea whether the answer is right or wrong. The first cash flow is assumed to occur at the valuation date (at the start of the first period). The NPV is calculated using actual day counts.