In this posting I am going to get into something which is financial. We are going to understand formula called NPV.
NPV stands for Net Present Value.
When should you use this formula?
When you want to compare two investments made in two different projects, this formula can tell us which is yielding better return.
You need to have a cash flow data from the start of the year when you made the investment, cash flow of each year should be also available. I have given you a screenshot to understand this better
First row in the screenshot shows the initial investment made for the projects. Cash flow for the remaining years are tracked and we are keeping the discount rate same for both the projects.
By keeping this data, we are using the NPV formula to find which project is yielding us better returns.
Syntax of the formula would
=NPV(INTEREST RATE, SELECT THE CASH FLOW VALUES(EXCEPT THE INITIAL YEAR)) + INITIAL YEAR INVESTMENT VALUE
If you closely the above screenshot, I have used the formula in the way which is explained above. We have the NPVs for both the projects.
Results are showing very clearly that, Project 2 is yielding better results than Project 1.
You can use this same formula to find out the better yielding investments who are promising same percentage of returns.
Hope this posting helped you in understanding how to use NPV at a basic level.
Happy Learning !!