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#1
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NPV - when does the first year start?
Hi,
I need a little help with the NPV function if possible. The help for the NPV function states that the first argument in the formula is the rate, that's fine. The second argument is the initial cost of investment one year from today and that the next argument is the return from the first year. Is the first year in the same time period as the year which includes the initial cost or is the first year effectively the end of the second year assuming that the costs were all incurred in the first year and the second year is when you start making money (termed as first year in the help)??? For example what happens if I have this scenario:- Year 1 - Cost £10000, return £5000 Year 2 - Return £10000 Year 3 - Return £10000 Year 4 - Return £10000 Many thanks in advance Gary |
#2
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NPV - when does the first year start?
On Thu, 9 Jul 2009 03:02:01 -0700 (PDT), Gazza wrote:
Hi, I need a little help with the NPV function if possible. The help for the NPV function states that the first argument in the formula is the rate, that's fine. The second argument is the initial cost of investment one year from today and that the next argument is the return from the first year. Is the first year in the same time period as the year which includes the initial cost or is the first year effectively the end of the second year assuming that the costs were all incurred in the first year and the second year is when you start making money (termed as first year in the help)??? For example what happens if I have this scenario:- Year 1 - Cost £10000, return £5000 Year 2 - Return £10000 Year 3 - Return £10000 Year 4 - Return £10000 Many thanks in advance Gary Perhaps reading the description, rather than looking at the example, would be more illuminating. ---------------------------------- NPV(rate,value1,value2, ...) Value1, value2, ... are 1 to 254 arguments representing the payments and income. The NPV investment begins one period before the date of the value1 cash flow and ends with the last cash flow in the list. The NPV calculation is based on future cash flows. If your first cash flow occurs at the beginning of the first period, the first value must be added to the NPV result, not included in the values arguments. For more information, see the examples below. ----------------------------------- So set up your Values while thinking in terms of "cash flow" and "periods" rather than "investment", "return", and "years". If money is going "away" from you (i.e. into an account, or investment), enter it as a negative value. If money is coming "towards" you (i.e. as a return on your investment, rental income, interest being paid, etc) then enter the value as a positive number. Also note that if your first cash flow occurs at the BEGINNING of the first period, you don't include it in the series but add it to the computed NPV. --ron |
#3
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NPV - when does the first year start?
"Gazza" wrote:
Is the first year in the same time period as the year which includes the initial cost or is the first year effectively the end of the second year Neither. First, realize that the NPV function has no concept of dates. (XNPV does, though.) So when the costs occur relative to the period depends on how you structure the data. So when using NPV, the only thing to realize is that the cash flows are assumed to occur at the same relative point in each period, be it the beginning, middle, end and anything in between. It might help to look at the NPV formula under "Remarks" in the NPV help page. If you are unfamiliar with the mathematical notation, it is effectively: NPV function = CF1/(1+r)^1 + CF2/(1+r)^2 + .... The key is: the first cash flow parameter is discounted. In most uses of NPV, the initial cash flow, dubbed CF0, should not be discounted. So the actual NPV, as it might computed with an HP business calculator is: NPV = CF0 + CF1/(1+r)^1 + CF2/(1+r)^2 + .... assuming that the costs were all incurred in the first year and the second year is when you start making money (termed as first year in the help)??? But that is not what you wrote in your example. You wrote: "Year 1 - Cost £10000, return £5000". In order to use NPV effectively, you need to decide whether to combine the Year1 return with the Year1 cost (i.e. -10000 + 5000 = -5000), which would make sense if the return occurred close to the initial investment, or to combine the Year1 return with the Year2 return (10000 + 5000 = 15000), which would make sense if the return occurred close to the Year2 return. Alternatively, shift your concept of years. Suppose you invested 10000 in Jan 2005, received a return of 5000 in Dec 2005, and received all other returns in Dec of subsequent years. In that case, for the purpose of using NPV, I would treat the investment as if it occurred in Dec 2004. So the NPV would be: =Y1 + NPV(rate,Y2:Y5) where Y1 is -10000 and Y2:Y5 is 5000, 10000, 10000 and 10000. Alternatively, assign dates to each cash flow and use XNPV. ----- original message ----- "Gazza" wrote in message ... Hi, I need a little help with the NPV function if possible. The help for the NPV function states that the first argument in the formula is the rate, that's fine. The second argument is the initial cost of investment one year from today and that the next argument is the return from the first year. Is the first year in the same time period as the year which includes the initial cost or is the first year effectively the end of the second year assuming that the costs were all incurred in the first year and the second year is when you start making money (termed as first year in the help)??? For example what happens if I have this scenario:- Year 1 - Cost £10000, return £5000 Year 2 - Return £10000 Year 3 - Return £10000 Year 4 - Return £10000 Many thanks in advance Gary |
#4
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NPV - when does the first year start?
On 9 July, 18:21, "JoeU2004" wrote:
"Gazza" wrote: Is the first year in the same time period as the year which includes the initial cost or is the first year effectively the end of the second year Neither. First, realize that the NPV function has no concept of dates. *(XNPV does, though.) *So when the costs occur relative to the period depends on how you structure the data. So when using NPV, the only thing to realize is that the cash flows are assumed to occur at the same relative point in each period, be it the beginning, middle, end and anything in between. It might help to look at the NPV formula under "Remarks" in the NPV help page. *If you are unfamiliar with the mathematical notation, it is effectively: NPV function = CF1/(1+r)^1 + CF2/(1+r)^2 + .... The key is: *the first cash flow parameter is discounted. *In most uses of NPV, the initial cash flow, dubbed CF0, should not be discounted. *So the actual NPV, as it might computed with an HP business calculator is: NPV = CF0 + CF1/(1+r)^1 + CF2/(1+r)^2 + .... assuming that the costs were all incurred in the first year and the second year is when you start making money (termed as first year in the help)??? But that is not what you wrote in your example. *You wrote: *"Year 1 - Cost £10000, return £5000". In order to use NPV effectively, you need to decide whether to combine the Year1 return with the Year1 cost (i.e. -10000 + 5000 = -5000), which would make sense if the return occurred close to the initial investment, or to combine the Year1 return with the Year2 return (10000 + 5000 = 15000), which would make sense if the return occurred close to the Year2 return. Alternatively, shift your concept of years. *Suppose you invested 10000 in Jan 2005, received a return of 5000 in Dec 2005, and received all other returns in Dec of subsequent years. *In that case, for the purpose of using NPV, I would treat the investment as if it occurred in Dec 2004. *So the NPV would be: =Y1 + NPV(rate,Y2:Y5) where Y1 is -10000 and Y2:Y5 is 5000, 10000, 10000 and 10000. Alternatively, assign dates to each cash flow and use XNPV. ----- original message ----- "Gazza" wrote in message ... Hi, I need a little help with the NPV function if possible. The help for the NPV function states that the first argument in the formula is the rate, that's fine. The second argument is the initial cost of investment one year from today and that the next argument is the return from the first year. Is the first year in the same time period as the year which includes the initial cost or is the first year effectively the end of the second year assuming that the costs were all incurred in the first year and the second year is when you start making money (termed as first year in the help)??? For example what happens if I have this scenario:- Year 1 - Cost £10000, return £5000 Year 2 - Return £10000 Year 3 - Return £10000 Year 4 - Return £10000 Many thanks in advance Gary Thanks for all your help. Your replies have been very useful |
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