Net Present Value (NPV) Template

Net Present Value (NPV) Template

Use this Financial Edge NPV Template to evaluate investment opportunities by calculating the present value of future cash flows. NPV helps determine whether a project or investment will create value, making it one of the most widely used tools in corporate finance and capital budgeting.

What is Net Present Value (NPV)?

Net present value (NPV) is the calculation that determines what cash flows in the future are worth today. Future cash flows are discounted back to present day values using a discount rate, typically the weighted average cost of capital (WACC). The underlying notion is the ‘time value of money’ – cash today is worth more than cash in the future.

Download the Free Template

Download the free Financial Edge net present value template now. This Excel download will show two methods to derive NPV from cash flow forecasts.

Net Present Value (NPV) Template

Steps for using the NPV template:

1. 1. Download the Excel template
   2. Enter your cash flow projections in the blue font cells – this will likely include an investment cost (or cash outflow) in year 0 as shown in the example
   3. Input the discount rate based on your cost of capital
   4. Check the row displaying the year or time period in question in numerical formal (e.g. year 1 is ‘1’)
   5. Calculate the discount factor for each year using the formula:

Discount Factor = 1 / (1+ Cost of Financing) ^ Year

Multiply the cash flow by the discount rate for each year to get the present value of cash flows:

Present Value of Cash Flows = Cash Flow X Discount Rate

Sum the present values to get a single net present value for all the cash flows

Or use the NPV function in Excel to derive the net present value

NPV = (Discount Rate, Year 1-8 Cash Flows) + Year 0 Cash Flow

Review the resulting NPV and investment decision

To Build an NPV Model, Follow These Steps:

Step 1 – Forecast Cash Flows

Estimate the cash inflows and outflows from the investment. This includes revenues, operating costs, taxes, and capital expenditures over the project’s life.

This will produce a single cash flow (which can be positive or negative each year) which can then be inserted into the model to override the blue cash flow figures.

Step 2 – Choose a Discount Rate

Select the appropriate rate to discount future cash flows back to their present value.

Often, the Weighted Average Cost of Capital (WACC) is used, as it represents the required return demanded by investors.

Step 3 – Discount Future Cash Flows

Apply the discount rate to each period’s projected cash flow to calculate its present value. The further in the future the cash flow, the lower its present value will be.

In this template, the 40 due in year 8 will be discounted to a greater degree than the 40 due in year 1 to reflect the risk associated with cash flows further out in the future.

Step 4 – Subtract Initial Investment

Deduct the upfront cost of the project or asset purchase from the total present value of future cash flows.

In the template, this can be done by inserting a cash outflow for the total value in year 0.

Step 5 – Interpret the Result

If the NPV is positive, then the project is expected to add value and should be considered as an investment possibility. If the NPV is negative, then the project is expected to destroy value and should be rejected.

Why NPV Matters

Net present value is a hugely useful took when making investment decisions. Being able to quantify the value of future cash flows provides a clear signal on whether to proceed with an investment or not. It considers both the timing and risk of cash flows making it a value-orientated decision.

Perhaps most importantly, NPV can be universally applied, it can be used by analysts, investors, and corporate managers for evaluating capital projects, acquisitions and investments across many asset classes.

Conclusion

Having a template to calculate net present value quickly is an important tool when initially assessing an investment. A valuation metric such as this does rely on the quality of the cash flow forecasts. If there is any uncertainty, it can be useful to do a series of NPV scenarios to determine if an investment is viable or not.

Also, if market conditions change it is important to revisit the assumptions for the cash flow forecasts as well as the WACC or return requirement needed.