Outlook Tips How to calculate discount rate or price in Excel? When Christmas is coming, there must be many sale promotions in shopping malls. But if the different kinds of items have different discounts, how can you calculate the discount rates or prices of the different items? Now, I talk about two formulas for you to calculate the discount rates and discount prices in Excel. Calculate discount rate with formula in Excel The following formula is to calculate the discount rate. Type the original prices and sales prices into a worksheet as shown as below screenshot: See screenshot:
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Net present value NPV is the value of a series of cash flows over the entire life of a project discounted to the present. In simple terms, NPV can be defined as the present value of future cash flows less the initial investment cost: For a single cash flow, present value PV is calculated with this formula: The above formula gives this answer: Net present value NPV adds up the present values of all future cashflows to bring them to a single point in present.
And because the idea of "net" is to show how profitable the project is going to be after accounting for the initial capital investment required to fund it, the amount of initial investment is subtracted from the sum of all present values: Or How does the net present value help in evaluating a financial viability of a proposed investment? It is assumed that an investment with a positive NPV will be profitable, and an investment with a negative NPV will be unprofitable. This concept is the basis of the Net Present Value Rule, which says that you should only engage in projects with a positive net present value.
Excel NPV function The NPV function in Excel returns the net present value of an investment based on a discount or interest rate and a series of future cash flows. The syntax of the Excel NPV function is as follows: NPV rate, value1, [value2], … Where: Rate required - the discount or interest rate over one period.
It must be supplied as percentage or a corresponding decimal number. Value1, [value2], …- numeric values representing a series of regular cash flows.
Value1 is required, subsequent values are optional. In the modern versions of Excel to , up to value arguments can be supplied; in Excel and older — up to 30 arguments. Values must occur at the end of each period. If the first cash flow initial investment occurs at the beginning of the first period, use one of these NPV formulas.
Values must be supplied in chronological order and equally spaced in time. Use negative values to represent outflows cash paid out and positive values to represent inflows cash received. Only numerical values are processed.
Empty cells, text representations of numbers, logical values, and error values are ignored. By default, it is assumed that an investment is made one period before the value1 date. For this reason, an NPV formula in its pure form works right only if you supply the initial investment cost one period from now, not today!
To illustrate this, let's calculate net present value manually and with an Excel NPV formula, and compare the results. Let's say, you have a discount rate in B1, a series of cash flows in B4: B9 and period numbers in A4: Supply the above references in this generic PV formula: Due to the clever use of absolute and relative cell references, the formula adjusts perfectly for each row as shown in the screenshot below.
Please notice that we calculate the present value of the initial investment too since the initial investment cost is after 1 year, so it is also discounted. After that, we sum all the present values: B9 As you can see, the results of both calculations match exactly: But what if the initial outlay occurs at the start of the first period, as it typically does?
Because the initial investment is made today, no discounting applies to it, and we simply add this amount to the sum of the present values of future cash flows since it's a negative number, it is actually subtracted: Does this mean we cannot rely on the NPV formula in Excel and have to calculate net present value manually in this situation?
Of course, not! You will just need to tweak the NPV function a little as explained in the next section. How to calculate NPV in Excel When the initial investment is made at the start of the first period, we can treat it as a cash flow at the end of the previous period i.
With that in mind, there are two simple ways to find NPV in Excel. Since the initial outlay is typically entered as a negative number, you actually perform the addition operation: Because we want "net" i. Please see the compact form of the NPV formula. I personally believe the first one is simpler and easier to understand. Supposing you have the initial outlay in B2, a series of future cash flows in B3: B7, and the required return rate in F1.
To find NPV, use one of the following formulas: NPV formula 1: NPV Formula 2: This formula includes the initial cost B2 in the range of values. The below screenshot shows our Excel NPV calculator in action: To make sure our Excel NPV formulas are correct, let us check the result with manual calculations.
First, we find the present value of each cash flow by using the PV formula discussed above: In this example, we are dealing with yearly cash flows and annual rate. If you are to find quarterly or monthly NPV in Excel, be sure to adjust the discounting rate accordingly as explained in this example. But they differ in one important way: Present value PV - only accounts for cash inflows. Net present value NPV — is the difference between the present value of cash inflows and the present value of cash outflows.
It accounts for the initial outlay required to fund a project, making it a net figure. In Microsoft Excel, there are two essential differences between the functions: The NPV function can calculate uneven variable cash flows. The PV function requires cash flows to be constant over the entire life of an investment. With NPV, cash flows must occur at the end of each period. PV can handle cash flows that occur at the end and at the beginning of a period. The primary difference between the functions is as follows: NPV deems all time periods to be equal.
XNPV allows you to specify dates that correspond to each cash flow. For this reason, the XNPV function is a lot more precise when dealing with a series of cash flows at irregular intervals. Unlike NPV, the Excel XNPV function is implemented "normally" - the first value corresponds to the outflow that occurs at the beginning of the investment.
All successive cash flows are discounted based on a day year. In terms of syntax, the XNPV function has one additional argument: XNPV rate, values, dates As an example, let's use both functions on the same data set, where F1 is the discount rate, B2: B7 are cash flows and C2: C7 are dates: In case of irregular intervals, the difference between the results is very significant: Common errors when calculating NPV in Excel Because of a quite specific implementation of the NPV function, many errors are made when calculating net present value in Excel.
The simple examples below demonstrate the most typical errors and how to avoid them. If you supply different intervals, say years and quarters or months, the net present value will be incorrect because of non-coherent time periods. Missing periods or cashflows NPV in Excel does not recognize omitted periods and ignores empty cells. To calculate NPV correctly, please be sure to provide consecutive months, quarters, or years and supply zero values for time periods that have null cash flows.
Discounting rate does not correspond to actual time periods The Excel NPV function cannot adjust the supplied rate to the given time frequencies automatically, for example annual discounting rate to monthly cash flows. It is the user's responsibility to provide an appropriate rate per period. For this, you just need to divide the annual rate by the number of periods per year: