Chapter 12: Discounting and Depreciation Formulas 335

The difference between XNPV and NPV is that XNPV requires a series of dates to which the val-
ues relate. In the example shown in Figure 12-18, the NPV of a series of irregular cash flows is
found using XNPV.

Figure 12-18: The XNPV function works with irregular cash flows.

The companion CD-ROM contains the workbook irregular cash flows.xlsx,

which contains all the examples in this section.

The formula in cell B17 is

=XNPV(B3,B6:B15,A6:A15)

Similar to NPV, the result of XNPV can be checked by duplicating the cash flows and netting the
result with the first cash flow. The XNPV of the revised cash flows will be zero.

Unlike the NPV function, XNPV assumes that the cash flows are at the beginning of
each period instead of the end. With NPV, I had to exclude the initial cash flow from the
arguments and add it to the end of the formula. With XNPV, there is no need to do that.

Internal rate of return

The syntax for the XIRR function is

XIRR(value,dates,guess)

Just like XNPV, XIRR differs from its regular cousin by requiring dates. Figure 12-19 shows an
example of computing the internal rate of return on a series of irregular cash flows.

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 336 Part III: Financial Formulas

Figure 12-19: The XIRR function works with irregular cash flows.

The formula in B15 is

=XIRR(B4:B13,A4:A13)

The XIRR function has the same problem with multiple rates of return as IRR. It expects
that the cash flow changes signs only once: that is, goes from negative to positive or
from positive to negative. If the sign changes more than once, it is essential that you
plug the XIRR result back into an XNPV function to verify that it returns zero. Figure
12-19 shows such a verification although the sign only changes once in that example.

Using the FVSCHEDULE Function

The FVSCHEDULE function calculates the future value of an initial amount, after applying a series
of varying rates over time. Its syntax is

FVSCHEDULE(principal,schedule)

Calculating an annual return

You can use the FVSCHEDULE function to convert a series of monthly returns into an annual
return. Figure 12-20 shows the monthly returns for a mutual fund.

You can find the example in this section on the companion CD-ROM in a workbook
named fvschedule.xlsx.

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 Chapter 12: Discounting and Depreciation Formulas 337

Figure 12-20: Monthly returns for a mutual fund.

For the year, this fund returned 37.83%. The formula to calculate the annual return is

=FVSCHEDULE(1,B5:B16)–1

A principal of 1 is used because I’m interested only in the rate of the return, not the actual balance
of the mutual fund. The principal is subtracted from the end, so the result is the increase for only
the year.

Note that the FVSCHEDULE function does not follow the sign convention. It returns a
future value with the same sign as the present value.

Depreciation Calculations
Depreciation is an accounting concept whereby the value of an asset is expensed over time.
Some expenditures affect only the current period and are expensed fully in that period. Other
expenditures, however, affect multiple periods. These expenditures are capitalized (made into an
asset) and depreciated (written off a little each period). A forklift, for example, may be useful for
five years. Expensing the full cost of the forklift in the year it was purchased would not put the
correct cost into the correct years. Instead, the forklift is capitalized and one-fifth of its cost is
expensed in each year of its useful life.

The examples in this section are available on the companion CD-ROM. The workbook is
named depreciation.xlsx.

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 338 Part III: Financial Formulas

Table 12-1 summarizes Excel’s depreciation functions and the arguments used by each. For com-
plete details, consult Excel’s Help system.

Table 12-1: Excel Depreciation Functions

Function Depreciation Method Arguments*
SLN Straight-line. The asset depreciates by the same amount each year cost, salvage, life
of its life.
DB Declining balance. Computes depreciation at a fixed rate. cost, salvage, life,
period, [month]
DDB Double-declining balance. Computes depreciation at an acceler- cost, salvage, life,
ated rate. Depreciation is highest in the first period and decreases period, month, [factor]
in successive periods.
SYD Sum of the year’s digits. Allocates a larger depreciation in the ear- cost, salvage, life, period
lier years of an asset’s life.
VDB Variable-declining balance. Computes the depreciation of an cost, salvage, life, start
asset for any period (including partial periods) using the double- period, end period,
declining balance method or some other method you specify. [factor], [no switch]
*Arguments in brackets are optional.

The arguments for the depreciation functions are described as follows:

h cost: Original cost of the asset.

h salvage: Salvage cost of the asset after it has fully depreciated.
h life: Number of periods over which the asset will depreciate.
h period: Period in the life for which the calculation is being made.
h month: Number of months in the first year; if omitted, Excel uses 12.
h factor: Rate at which the balance declines; if omitted, it is assumed to be 2 (that is,
double-declining).
h rate: Interest rate per period. If you make payments monthly, for example, you must
divide the annual interest rate by 12.
h no switch: True or False. Specifies whether to switch to straight-line depreciation when
depreciation is greater than the declining balance calculation.

Figure 12-21 shows depreciation calculations using the SLN, DB, DDB, and SYD functions. The
asset’s original cost, $10,000, is assumed to have a useful life of ten years, with a salvage value of
$1,000. The range labeled Depreciation Amount shows the annual depreciation of the asset. The
range labeled Value of Asset shows the asset’s depreciated value over its life.

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 Chapter 12: Discounting and Depreciation Formulas 339

Figure 12-21: A comparison of four depreciation functions.

Figure 12-22 shows a chart that graphs the asset’s value. As you can see, the SLN function pro-
duces a straight line; the other functions produce curved lines because the depreciation is greater
in the earlier years of the asset’s life.

Figure 12-22: This chart shows an asset’s value over time, using four depreciation functions.

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