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How to Calculate Net Present Value

Updated on April 22, 2015
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The reason for this step by step look at NPV is because I found with an online search and even reading my textbook I didn't get the full instructions. I had only found the formula and just plugged in the information. I was not sure if the salvage value counted, but to find out from the teacher it did count. I wanted to share this useful information for any accounting students out there. I will also explain how to use excel to figure out NPV.

Step by Step Look at NPV

Net present value is a technique in capital budgeting. The technique is used to analyze the profitability of an investment. The formula for net present value is:

NPV=PV future cash flows-cost of investment

Example


Given Information:


Inflows $1,600

Purchase $5,000

Useful Life 3 years

Salvage Value $1,000

Desired Rate of Return 16%

You going to need to know the present value of future cash flows before you can figure out npv.

Present value of future cash flows


Year 1: $1,600/(1+.16)

1,600/1.16

1,379.3103

Year2: $1,600/(1.16)²

1,600/1.3456

1,189.0606

Year3: $1,600/(1.16)³

1,600/ 1.560896

1,025.05

year1-3= $3,593.42

Salvage Value Pv

1000/1.560896

640.65767

Pv= 3,593.42+640.66

$4234.08

NPV=4234.08-5,000

NPV= -$765.92



Using Excel to Figure NPV

I will be using Microsoft Excel 2007

Step1: Click the formulas tab

Step2: Click Financial

Step3: Scroll down to NPV and click it

Step4: Type .16 in the rate section

Steps5-7: Type 1,600 into each of the value sections to count for the three years.


This only takes care of cash inflows that does not take care of the salvage value when it is needed.

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    • profile image

      atca 4 years ago

      i agree

    • profile image

      shaun 4 years ago

      Thank you alotz dear for helping to me understand

    • truthfornow profile image

      truthfornow 5 years ago from New Orleans, LA

      You got me to read this article because I wanted to know what in the heck an NPV was. I found accounting very hard when I took it. Best wishes on your studies.

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