You are on page 1of 6

# NPV with multiple compounding periods and uniform cash flows

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.

## rate m N INV pmt Salvage

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

## Doing it this way is faster than by calculator but still takes

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