Corporate financeLesson 4 of 4 in the course How Companies Think about Investing

Excel-Based Project Valuation: NPV, IRR, and NPV Profiles

5 flashcards · 5 quiz questions · 5 match pairs · 4 fill-in sentences · English

Save course
Lesson progress
0 / 5

Your progress is kept in this browser only.Sign up to save it

Summary

Excel can automate the calculations used to evaluate a company investment. This lesson explains how to organize project cash flows and calculate net present value (NPV) and internal rate of return (IRR), while avoiding a common mistake in Excel’s NPV function.

A project’s cash flows should be placed in chronological order, with the initial investment at time 0 and later cash flows in years 1, 2, and so on. Consider a project that costs $30,000 today and generates $6,000 in year 1. Its cash inflows increase by $2,000 each year, reaching $18,000 in year 7. The company’s cost of funds is 9%.

All flashcards

What is net present value (NPV)?
The sum of a project's cash flows expressed in present-value terms, including the initial investment at time 0.
What timing convention does Excel's NPV function use?
It treats supplied cash flows as end-of-period amounts beginning in period 1; it omits time 0.
How is a time-0 outflow included in an Excel NPV calculation?
Apply NPV to future cash flows, then add the initial outflow as a negative value.
What does Excel's IRR function calculate?
The discount rate that makes the NPV of the supplied cash-flow sequence equal zero.
What does an NPV profile show?
A project's NPV calculated across a range of possible discount rates.

Quiz questions

  1. How does Excel's NPV function treat the first cash flow in its input range?Answer: It discounts it as a period-1 cash flow and omits time 0.
  2. How should a time-0 investment be included when calculating NPV with Excel's NPV function?Answer: Apply NPV to future cash flows and add the negative time-0 amount.
  3. A project's time-0 outflow is in B2, future cash flows are in C2:I2, and the discount rate is in B1. Which formula calculates NPV correctly?Answer: =NPV(B1,C2:I2)+B2
  4. What does a project's internal rate of return represent?Answer: The discount rate at which the project's NPV equals zero.
  5. A project has an IRR of 27.7% and a cost of funds of 9%. What does the IRR rule indicate?Answer: Accept the project because its IRR exceeds the cost of funds.

Based on Principles of Finance by Julie Dahlquist, Rainford Knight (OpenStax), licensed CC BY 4.0. Adapted into a summary, flashcards and quizzes.

More in Corporate finance

All Corporate finance lessons
Corporate financeCapital Structure: Debt, Equity, and Market-Value Weights5 flashcards · 5 quiz questions · 4 gamesPlay free →Corporate financeWACC Estimation: Capital Weights, Equity Costs, and Net Debt5 flashcards · 5 quiz questions · 4 gamesPlay free →Corporate financeCapital Budgeting: Project Comparisons, Capital Constraints, and Uncertainty5 flashcards · 5 quiz questions · 4 gamesPlay free →Corporate financeProject Evaluation: Profitability Index, Discounted Payback, and MIRR5 flashcards · 5 quiz questions · 4 gamesPlay free →Corporate financeCapital Structure, Leverage, WACC, and Interest Tax Shields5 flashcards · 5 quiz questions · 4 gamesPlay free →Corporate financeFinancial Forecasting: Statements, Analysis, and Ethical Assumptions5 flashcards · 5 quiz questions · 4 gamesPlay free →