Excel 2013 Tutorial - How to Calculate the Net Present Value
In this tutorial you will learn:
How to Calculate the Net Present Value of an Investment
Suppose that someone wanted you to invest $30,000 in a new business. In exchange for your investment, you would be entitled to an annual dividend over the next seven years. Further suppose that you would like to earn an 7 percent return on your money.
To determine whether this investment is worth your while, you can use the following NPV function to calculate the net present value of that investment.
Another scenario in which you can use NPV is when you make smaller payments at the beginning of the investment period with the expectation of future cash inflows at the end.
Now suppose that instead of one $30,000 payment, assume that you would only have to invest $11,000 the first year, $11,500 the second year, and $4,500 the third year.
The amount you’re required to invest goes down as the business grows and is able to use its own profits to grow. By year four, no more investment is required and the business is expected to be profitable enough to start paying a dividend.