Present Value of Single / Multiple Cash Flows
However, that is the hard way. If no interest is earned on the interest on the investment, it is called as simple interest.
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In such cases, we need to calculate the present value of all such future cash flows discounted with their respective years and discount rate and then add up them together to find out the sum of the present value. It would be then compared with the initial investment required for the project. If the net present value is positive, the project would be considered for acceptance. The formula for calculating the present value of a series of cash flows is:.
All the cash inflows would be received at the end of the respective years. These factors will also be provided in the Present value table. If this sum exceeds the initial investment, the project would be considered for acceptance.
If you are stuck with a Present Value Homework problem and need help, we have excellent tutors who can provide you with Homework Help. The more frequent compounding occurs in a year, the more would be the future value as illustrated below. Similarly, if interest is compounded quarterly or monthly, FV would accordingly be greater. If no interest is earned on the interest on the investment, it is called as simple interest. The future value of an investment in such cases would be calculated by the following formula: In many instances, we may be interested in the future value of series of payments of different amounts at different time periods.
In such cases, we can find the FV as illustrated below: Find the future value. There is another way, as seen in the picture below note that I have eliminated the calculations in column C. Realize that one way to find the future value of any set of cash flows is to first find the present value of those cash flows. Next, find the future value of that present value and you have your solution. The picture, below, demonstrates the process:. Ok, at least its easier and neater than adding up the future values of each of the individual cash flows.
It is also less confusing to anybody who looks at your spreadsheet. However, be aware that Excel's NPV function doesn't really calculate net present value. Instead, it simply calculates the plain old present value of uneven cash flows. It does not, and this is vitally important, take the cost of the investment into account. See my blog post on this topic. We'll see how to deal with this in the example below. What is the NPV? Make a copy of your previous worksheet and paste it into a new worksheet, so that it looks like the one below.
Recall that the NPV, according to the actual definition, is calculated as the present value of the expected future cash flows less the cost of the investment. As we've seen, we can use the NPV function to calculate the present value of the uneven cash flows in this example.
Therefore, the formula to calculate the net present value is: Note that since the cost of the investment is given as a negative number in B4 it is a cash outflow , I had to ADD it to the result of the NPV function. This IRR function is defined as:. Note that the "values" is a contiguous range of cash flows, including the initial outlay. The "guess" argument is optional and generally isn't needed.