baseballplaya88 said:
Building costs $400,000. Produces inflow after operating costs of $100,000 in year 1, $200,000 in year 2, and $300,000 in year 3. Opportunity cost of capital is 12%. What is the NPV? Thanks!
NPV is the difference between net cash flows amounts in today's money terms from initial cash outlay
I will explain how to do this with MS Excel in a bit
Let us try to do this with a numerical solution
At first we discount each cash inflow at the discount rate or opportunity cost, to do this we will need to find the Present Value of the Net Cash Flow which works as this
PV = R . PVIF(i,n)
PV is the present value of the amount
R is the Payment or receipt
PVIF is what is called Present Value Interest Factor of $1 at i% for n periods
PVIF(i,n) = 1/(1+i)^n
Let us set this up in a tabular form
N--------------------Payment (R)-----------------PVIF @ (12%,n)-----------Present Value
1--------------------$100,000---------------------0.893---------------------$89,300
2--------------------$200,000---------------------0.797---------------------$159,400
3--------------------$300,000---------------------0.712---------------------$213,600
-------------------------------------------Sum of PV of Cash flows-------- $462,300
The initial cash outlay is $400,000
NPV = $462,300 - $400,000
NPV = $62300
We can use MS Excel to find NPV, but it is a bit confusing if you were to use the NPV Function
The syntax is NPV(rate,value1,value2, ...)
but this function will only give us the Sum of PV of Cash flows
=NPV( 0.12, 100000, 200000, 300000 )
$462,258.56
The reason this value differs a bit from what we calculated earlier is due to the rounding off PVIF to three decimal places
So the formula you should type in MS Excel to get the NPV is
= -400000 + NPV( 0.12, 100000, 200000, 300000 )
$62,258.56