How to Calculate Net Present Value
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
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)
Salvage Value Pv
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.