Cash and wealth are two of the fundamental concepts of corporate finance. Cash is the amount of money that a company has available to use for its operations and investments. Wealth is the value of the company’s assets minus its liabilities. A company’s goal is to maximize its wealth, which is also known as its shareholder value.
One way to measure a company’s wealth is to use the net present value (NPV) method, which discounts the future cash flows of a project or investment by a certain rate of return, and then subtracts the initial cost. The NPV tells us how much value a project or investment adds to the company’s wealth. A positive NPV means that the project or investment is profitable, and a negative NPV means that it is not.
To calculate the NPV in Excel, we can use the NPV function, which has the following syntax:
=NPV (rate, value1, [value2], …)
The rate argument is the discount rate or the required rate of return. The value arguments are the cash flows that occur at the end of each period. The first cash flow (value1) must be the initial cost, which is usually a negative number.
For example, suppose a company is considering investing in a project that costs $10,000 and generates cash flows of $3,000, $4,000, $5,000, and $6,000 in the next four years. The company’s required rate of return is 10%. To calculate the NPV of this project, we can use the following formula in Excel:
=NPV (0.1, -10000, 3000, 4000, 5000, 6000)
The result is $2,855.73, which means that the project adds $2,855.73 to the company’s wealth.
To make the calculation more dynamic, we can use cell references instead of hard-coded numbers. For example, we can enter the initial cost in cell B2, the cash flows in cells B3:B6, and the discount rate in cell B7. Then, we can use the following formula in cell B8:
=NPV (B7, B2:B6)
The result is the same as before, but now we can easily change the inputs and see how the NPV changes.
We can also use the XNPV function, which is more accurate than the NPV function, because it takes into account the specific dates of the cash flows. The XNPV function has the following syntax:
=XNPV (rate, values, dates)
The rate argument is the same as in the NPV function. The values argument is a range of cells that contain the cash flows. The dates argument is a range of cells that contain the dates of the cash flows. The first date (value1) must be the date of the initial cost.
For example, suppose the project in the previous example has the following dates for the cash flows:
| Date | Cash Flow |
|---|---|
| 1/1/2023 | -10,000 |
| 3/31/2023 | 3,000 |
| 6/30/2023 | 4,000 |
| 9/30/2023 | 5,000 |
| 12/31/2023 | 6,000 |
We can enter these dates in cells C2:C6, and use the following formula in cell B9:
=XNPV (B7, B2:B6, C2:C6)
The result is $2,894.01, which is slightly different from the NPV function, because it accounts for the exact timing of the cash flows.
