All right, so welcome back as a finance professional, you will appreciate that one of the most sophisticated
methods of investment appraisal that we ever have is net present value.
That is, in short, we call it NPV.
So in NPV, what we are going to do is that we will take all the cash flows from the project in the
early form, and then we will multiply that with the discount factor to help with the present values.
And then we will conclude all the present value of cash flows and cash outflows and cash flows, and
that will give us the net present value.
So just to take all of this, all of that into just to put all of that into a context, let's take a
look at this project.
So we have a project here which has a life of four years and investment of fifty thousand dollars at
the beginning.
Then it has early returns of twenty thousand in year one and two and then fifteen thousand a year,
three and four has to have ten thousand dollars as net cash inflow from the project.
But it also has a salvage value in the year for that is basically the end of the project.
And so I can say that the total return and your four is twenty thousand dollars and then we have a discount
rate of 10 percent.
And finally we have to calculate the net present value.
Now, you know, how do we calculate the net present value?
First of all, we list all the cash flows and then you multiply the discount, correct?
Well, the good news about the calculation of net present value is that in Excel, you can do that by
just writing a very small and easy formula.
But before we jump to that magical formula here, first of all, I solve this net present value question
manually with manually.
I mean, to say it all started.
OK, so we have the investment of fifty thousand dollars at the beginning and then we have the inflows
in one, two, three and four of ten thousand dollars each.
So I will just copy paste from here and I will say that in order for rather we have twenty thousand
dollars.
OK, then we have to take that into account.
But also in year one at the discount factor has to be one and done in year one.
But I will do that.
I will devote the last year the second factor divide by one point one to one point one is basically
coming from hundred percent plus 10 percent.
And then I have divided that with one hundred to remove that percentage sign.
So basically one point one hundred ten percent.
So my discount rate for the first period for the first year is one nine zero nine.
And then I will have to copy and paste this formula to all the cells to make sure that we have done
each.
We have completed the discount factor in each year.
So if I have to, you can see what exactly is happening the last your discomfort has been multiplied
again with one point one.
All right.
So time to calculate the present values, cash flows multiplied by the discount factor.
And here we have the present values for all the different cash flows and.
One last thing that I'm going to do is to calculate the net present value, and here we go.
I'm sorry, not NPV equals the sum of all of these and that as my present value.
Forty nine.
Six for one.
That was not difficult.
Right.
So it was very easy.
Now, what I have to do is that I have to show you the same calculation of NPB, but rather with the
Excel magic.
So what I will do is that I would say equals first of all, I would be given the easy rosalio.
So what I have to do that because NPB formula that I'm going to right now, that is NPV this formula
basically starts from period one.
This formula has the built-In assumption that the Yasukawa has not been included in this formula.
So we have to start from one.
That means I will have to give the zero separately and then the formula.
Now, the first argument that Exel is asking me here is basically the rate.
I'll take the rate here.
That is 10 percent the second value.
The second thing is asking me you can see here is value one, two, three and four.
So rather than I take this value and Branscombe and then I take the second value, which I definitely
can do, I will select all of this range and I will close the bracket.
Another press enter now and it should give me the net present value.
So here you have nine six for one, the same net present value that you have done after this complete
chart that could have been done by just writing the small equation.
So I really hope that you are excited to see this net present value formula.
There was one problem with this formula and that was this we had to consider years ago separately.
And the second problem with this formula is that this formula basically assumes that all the cash flows
are in early format and all the cash flows basically are in the same sequence.
One, two, three, four onwards.
There are no gaps.
So the good news that we can resolve that in Excel and for that we will be using another formula that
is called X and Beby and next to that in the next lecture.