Incorrect NPV Function in Excel
I cover one of Excel’s many nuances: the incorrect Net Present Value function, courtesy of Microsoft developers. The NPV function in Excel has been incorrect ever since Excel could first calculate Net Present Value. As my example I use a simple corporate project with an initial cash outlay, three cash inflows, and a cost of capital of 12%. I cover the flaws of the NPV function, its usage, and how one may properly use it to correctly calculate the Net Present Value of a project.
I’ve actually done some digging and discovered why Excel’s NPV function is incorrect. It’s actually correct, but it is based on an assumption that is commonly “not the case” for financial projects. Excel’s NPV function assumes that each value in the data series, or each “cash flow”, occurs at the “end of the period.” This means that it assumes the initial cash outlay occurs at the “end of the period” as well. That is most often not the case however. Generally, initial cash outlays, or “initial investments” occur at the “beginning of the period”, and when that is the case (which it is most of the time), you must do as I’ve instructed in this screencast. Enjoy!