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TUTORIAL

CALCULATE NPV USING EXCEL

This tutorial covers the calculation of the Net Present
Value (“NPV”) in Excel. It assumes the reader is familiar
with the concept of net present values and concentrates
on how to calculate an NPV in Excel and considerations to
be aware of when performing this calculation.
The NPV can be defined as the sum of present value (PVs) of
future cashflows after netting out the initial cashflow /
investment made. It is commonly used for capital budgeting
and widely throughout many mathematics common in
economics and the finance industry. NPV can be formulated
as:
NPV = Total PV of future cashflows – Intial cashflow (CF0)
n Screenshot 1: Manual calculation of NPV
CFi
NPV = ∑ − CFo Refer to Screenshot 1. Let us work through an example to
i =1 (1 + r )^ i calculate NPV of project cashflows in order to calculate the
project NPV.
CF1 CF 2
NPV = [ + + ...] − CFo • CFi (Line 104) – This is the cashflow before funding that
(1 + r )^1 (1 + r )^ 2 •
we would like to calculate the NPV
Annual r (Line 106) – The discount rate used is 10% p.a.
r = discount rate • Periodic r (Line 107) – The periodic discount rate is
calculated as shown above.
n = time period of the project / investment • Discount factor – We would like to discount back the
cashflows to the model start date (31-Dec-08), thus
What is the best way to calculate an NPV of a set of
calculate the discount factor as shown above.
cashflows?
• PVi (Line 111) – Calculate the PV of each periodic
We will discuss in this tutorial the possible method to calculate cashflow in the model by dividing the CFi with the
the NPV: discount factor
• NPV (Line 112) – Calculate the NPV by summing up the
• Calculate from first principles without Excel function PVi. In this example, the NPV of project cashflows as of
• Calculate NPV using Excel function NPV() model start date is $20.8 million
• Calculate NPV using (X)NPV
• Checking the NPV calculation
Using NPV() in Excel
An excel workbook has been prepared to demonstrate the
NPV() syntax:
NPV calculation, it would be best to download the workbook
whilst reading this document. NPV(r, CF1, CF2, …)
We could calculate NPV using Excel function NPV() but it has
Calculate NPV from first principles some limitations:
This approach requires just a small amount more code than
• The CFi values in NPV calculation must be equally
using the Excel functions but is more transparent. Calculating
spaced in time and occur at the end of each period.
the NPV from first principles allows the user to sense check
• The CFi must be entered in the correct sequence.
every aspect of NPV calculation.
• The NPV calculation is based on future cash flows. If the
From the NPV formula written above, we could lay out the first cashflow occurs at the beginning of the first period,
calculation in the spreadsheet using following steps. the first value must be added to the NPV result.

• CFi – Bring in the sets of future cash flows to be

assessed Using XNPV() in Excel
• r – Calculate the discount rate Due to its limitation, the NPV function (without the X) is best
• PVi – Calculate the PV of cashflow in each period avoided. Cashflow models such as in project finance
• NPV – Sum up all the PVi, remember to net out any transactions are often presented in more detailed during
initial cash / investment that has not been accounted in. construction period as opposed to during operations.
For example we often find many project finance models have
monthly calculations during construction and perhaps semi-
annual / annual during operations.

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The more robust function would be XNPV(). It returns the net
present value for a schedule of cash flows that are not
necessarily periodic. XNPV() is an added-in function in Excel
and the syntax is:
XNPV(r, CFi, dates)

Screenshot 3: Data table of NPV at various discount rates

Checking the NPV calculation

NPV is related to the IRR function (internal rate of return). IRR
is the rate for which NPV equals zero. We could double-check
Screenshot 2: Using XNPV function NPV calculation by firstly calculating the IRR and then feed the
As demonstrated in Screenshot 2, calculate NPV using the IRR back into the NPV calculation as a discount rate.
Excel XNPV() function yields the same result as manual XNPV(XIRR(...), ...) = 0
calculation previous explained in Screenshot 1.

NPV calculation considerations

Considerations to be aware of when performing the NPV
calculation:
• Have you got time to do it ‘properly’ from first principles?
• Be aware of the limitations of NPV() function
• Be aware of the assumptions when using the XNPV()
• Clearly show the units of cashflows and the discount rate
• Checking and recheck the calculations at every stage Screenshot 4: NPV and IRR relationship
• Clearly show if it is pre or post tax
• Show if it is real or nominal Common applications of NPV
• Select the appropriate discount rate for the risk profile of
the project as it is a key variable in the NPV calculation • Capital budgeting
• Presenting the results clearly, maybe at a range of NPV is an indicator of how much value an investment or
discount rates project adds. Amongst other factors, theoretically a project with
• Communicate the shape of the NPV (discount rate) a positive NPV should probably be accepted. Or in financial
profile, maybe there is more than one root to NPV(x)=0 theory, if there is a choice between two mutually exclusive
• Identify if it is a Project NPV or an Equity NPV (for projects then the one has the higher NPV should be selected.
geared projects)
• Calculate project’s Loan Life Cover Ratio (LLCR)
A substantial benefit of using the XNPV function is that it can
be copied and used to calculate the NPV at different discount LLCR is one of the most commonly used debt metrics in
rates. However this is not a good enough reason for using a project finance. It provides a measure of the number of times
black box formula as a quick 1-dimension data table with the NPV of projected cashflows over life of the loan can repay
discount rates as the vertical parameter will provide the same the outstanding debt balance.
output and can be easily tested.
LLCR = NPV (CFADS over loan life) / Debt balance b/f
• Determine debt capacity of certain project
Related to LLCR above, the borrowing capacity is usually
worked out by deciding the initial LLCR. For example if the
required LLCR is 3.0 to syndicate a loan of a particular project,
then the debt capacity of that project is one-third of the NPV of
the project’s available cashflows.

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Founded in 2004, Navigator Project Finance Pty Ltd (Navigator) is the project finance modelling expert. Headquartered
in Sydney, Australia, Navigator is raising the global benchmark in financial modelling services to the project finance
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throughout the Middle East, Asia and Europe, and conducts independent model reviews of project finance transaction
models. Navigator delivers fast, flexible and rigorously-tested project finance services that provide unparalleled
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