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Example 2

In the example below, the Excel Pv function is used to calculate the present value of an annuity
that pays $2,000 per quarter for a period of 4 years. The interest is 10% per year and each
payment is made at the start of the quarter.

Formulas: Results:

A A

Present value of an annuity Present value of an annuity


with an interest rate of 10% with an interest rate of 10%
per year and payments of per year and payments of
$2,000 per quarter over 4 $2,000 per quarter over 4
years (payment made at years (payment made at
1 start of each quarter): 1 start of each quarter):

2 =PV( 10%/4, 16, 2000, 0, 1 ) 2 -$26,762.76

Note that, in this example:

As the payments are made quarterly, it has been necessary to convert the annual interest rate of
10% into a monthly rate (=10%/4), and to express the 4-year period as a number of quarters (=16);

Again, as the initial investment is paid out, the calculated present value is negative.

The Excel NPV Function

The Excel NPV function calculates the Net Present Value of an investment, based on a supplied
discount rate, and a series of future payments and income.
The syntax of the function is:

NPV( rate, value1, [value2], [value3], ... )

where the arguments are as follows:

rate - The discount rate over one period.

value1, [value2], ... - Numeric values, representing a series of regular payments and
income, where:
Negative values are treated as payments;
Positive values are treated as income.

Note that:

If the value arguments are supplied individually, numbers, blank cells, logical values and text
representations of numbers are interpreted as numeric values, while other text values and error values
are ignored;
If the value arguments are supplied as an array, all non-numbers in the array are ignored.
In the latest versions of Excel, you can provide up to 254 value arguments to the NPV function,
but in Excel 2003, the function can only accept up to 29 values.

NPV Function Example


Example 1
A B

1 2% - Annual discount rate

2 -5000 - Initial investment cost after 1 year

3 800 - Return from year 1

4 950 - Return from year 2

5 1080 - Return from year 3

6 1220 - Return from year 4

7 1500 - Return from year 5

9 Net Present Value:

10 =NPV( A1, A2:A7 )

The spreadsheet on the right shows a simple example of the NPV function.
The rate and value arguments that are supplied to the function are stored in cells A1-A7 of the
spreadsheet and the NPV function is entered into cell B10.
This function gives the result 196.88.
Note that, in this example, the initial investment of $5,000 (shown in cell A2), is made at
the end of the first period. Therefore, this value is included as the first value1 argument to the
NPV function.
NPV Function Example 2
A B

1 5% - Annual discount rate

2 -10000 - Initial investment cost at start of year 1

3 2000 - Return from year 1

4 2400 - Return from year 2

5 2900 - Return from year 3

6 3500 - Return from year 4

7 4100 - Return from year 5

9 Net Present Value:

10 =NPV( A1, A3:A7 ) + A2

The spreadsheet on the right shows a further example of the NPV function in which the first
payment is made at the start of the first period.
Again, the rate and value arguments of the investment are stored in cells A1-A7 of the
spreadsheet and the NPV function is entered into cell B10.

This function gives the result 2,678.68.


Note that, as the initial investment of $10,000 (shown in cell A2), is made at the start of the first
period, this value is not included in the arguments to the NPV function. Instead it is added on
afterwards.

Excel IRR Function

Function Description
The Excel IRR function returns the Internal Rate of Return for a supplied series of periodic cash
flows (i.e. an initial investment value and a series of net income values).
The syntax of the function is:

IRR( values, [guess] )

Where the arguments are as follows:

values - An array of values (or a reference to a range of cells containing values)


representing the series of cash flows (investment and net income values).
This must contain at least one negative and at least one positive value.

[guess] - An initial guess at what the IRR might be. This is an optional argument,
which, if omitted, takes on the default value of 0.1 (=10%).
(Note: This is only a value for Excel to start off working with - Excel then uses an
iterative procedure to converge to the IRR).

Irr Function Example


In the spreadsheet below, an initial investment of $100 is shown in cell B1 and the net income
over the next 5 years is shown in cells B2-B6.

The IRR function in cell C2 shows the calculation of the Internal Rate of Return after 3 years and
the function in cell C4 shows the Internal Rate of Return after 5 years.

Formula: Result:

A B C A B C

Initial - IRR after 3 Initial - IRR after 3


1 Investment: $100.00 yrs: 1 Investment: $100.00 yrs:

2 Year 1 Income: $20.00 =IRR( B1:B4 ) 2 Year 1 Income: $20.00 -14%

IRR after 5 IRR after 5


3 Year 2 Income: $24.00 yrs: 3 Year 2 Income: $24.00 yrs:

4 Year 3 Income: $28.80 =IRR( B1:B6 ) 4 Year 3 Income: $28.80 13%

5 Year 4 Income: $34.56 5 Year 4 Income: $34.56

6 Year 5 Income: $41.47 6 Year 5 Income: $41.47


Note that, in the above example, the initial investment is a negative value, as this is an outgoing
payment, and the income payments are represented by positive values.