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Original Title: NPV With Multiple Compounding Periods and Uniform Cash Flows

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Here we have an investment opportunity with $10,000 initial investment cost and an expected terminal

value of $2000 at the end of seven years. Our RROR is 9%, compounded monthly. We estimate the

returns from this investment to be $750 per month.

0.09 12 7 10000 750 2000

What is the NPV of this opportunity?

One way to do this would be to find the PV of $750 one month in the future + PV of $750 two months in

the future + + PV $750 84 months in the future (7 years X 12 payments per year = 84 payments or

periods over the life of the investment). Sum up the present values, add the discounted salvage value

and subtract the initial investment cost. The formula would be:

N

Pn VN

NPV INV

n 1 (1 r ) (1 r ) N

n

Doing this on a calculator would take 4-eva. In Excel you could do it this way:

With monthly compounding, you divide the discount rate (0.09) by the number of periods per year (12).

For Nper, because were discounting each payment one at a time, you put in the current year; in this

case, period one is cell A5. Leave the PMT box empty; our monthly payment goes in the FV box. Were

discounting the future $750 to the present time. Fix the cell references to the rate and the number of

periods in the rate box, because those will remain the same for all 84 periods. Dont fix the reference in

the Nper box, because when we copy down for the other 83 periods, this will adjust the formula

automatically. At the bottom, use the =sum formula to sum up the PVs.

Discount the salvage

value using the =PV formula: Rate = $A$2/$B$2, Nper = C2*B2,PMT = blank,FV=F2. NPV = C90 (the sum

of our PVs) + B94 (PV of salvage) D2 (initial investment cost). NPV = $37,683

a long time. Because we get $750 every month a uniform cash flow we can treat it like an annuity

and save some steps. The formula morphs into:

1 (1 r ) N *m VN

NPV PMT INV

(1 r / m)

N *m

r/m

You could use the =NPV formula in Excel with all 84 periods:

Rate =

A2/B2 (annual rate divided by number of compounding periods). Rather than entering $750 (or the cell

references) 84 times (Value 1 through Value 84), you can highlight all the cells for the future values as

entered in the Value 1 box. Click OK. You still have to add the PV of the salvage and subtract the initial

investment to get the NPV. This is a little faster than discounting each payment one at a time, but this

isnt the fastest way to get the NPV (youd still have to have 84 rows of payments entered into the

spreadsheet).

The fastest way is to use the =PV formula. Where previously, we left the PMT box empty and put $750 in

the FV box, now well use the PMT box. This calculates the PV of an annuity, or uniform series of

payments (the PMT[] part of the formula above).

Rate is

the .09/12, as we did before, Nper = 7 years X 12 periods per year, PMT = -E2 (the negative sign gets us a

positive answer). Leave the other boxes empty. PV of $750 per month over 7 years = $46,615. Add the

discounted salvage and subtract the initial investment. This way, you dont need 84 rows with the

period, the $750 and the PVs. NPV = $37,683.

NPV = $37,683

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