The Excel formula to compute the net present value of cash flows for a $55,000 investment (−55,000 at year zero) and cash inflows of $20,000 per year for years 1 through 4, using a 4% discount rate is:
A) =NPV(0.04,−55000,20000,20000,20000,20000)
B) =NPV(−55000,20000,20000,20000,20000,0.04)
C) =NPV(0.04, 55000,−20000,−20000,−20000,−20000)
D) =NPV(55000,−20000,−20000,−20000,−20000,0.04)

Question

Quizplus · Accepted Answer

The correct formula for calculating the net present value (NPV) in Excel is =NPV(rate, value1, [value2], ...), where "rate" is the discount rate for one period, and "value1", "value2", etc., are the cash flows in each period. The initial investment is not included in the NPV function but is added or subtracted from the result of the NPV function. However, none of the options correctly applies this principle. Option A incorrectly includes the initial investment as part of the NPV function's arguments, which is not how the NPV function is designed to be used in Excel. The correct approach would involve calculating the NPV of the cash inflows and then subtracting the initial investment, but since none of the options reflect this, A is the closest to a correct implementation of the NPV function despite the mistake in including the initial investment within the function.

The Excel Formula to Compute the Net Present Value of Cash