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Using Excel to Determine NPV and IRR Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 16

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Financial Functions with Excel 2010 Built-in financial functions Useful for calculating NPV and IRR Accessed through the Formulas ribbon Utilize a function wizard Makes it easy to enter information

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Calculating NPV with Excel 2010 1. Enter the data into the worksheet in modified time line format. 2.Click Formulas, then choose Financial. A company plans to purchase a machine for $60,000 that is expected to generate $15,000 of cash flows in year 1, $18,000 in year 2, and $21,000 in year 3. A salvage value of $12,000 is estimated. The company’s required rate of return is 3.8%.

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Calculating NPV with Excel 2010 continued 3.A drop down box will be displayed. Scroll down and choose NPV. 4. The Function Argument wizard will appear.

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Calculating NPV with Excel Continued 5. Rate is the interest rate per period. Input with a percent sign or decimal format, e.g. 8.5%, or.085 C6:E6.085 6. There are 2 options for future cash flows: Enter each cash flow separately by year, where: Value1 is the cash flow expected for period 1 Value2 is the cash flow expected for period 2, etc. OR Select all cash flow amounts from contiguous cells for year 1 through the end of the useful life. DO NOT select the acquisition cost as one of the cash flows (i.e. year 0) Warning

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Calculating NPV with Excel Continued 7. Click OK and the present value of all the cash inflows will appear in a worksheet cell. 8.The NPV formula is displayed in the formula bar as: =NPV(0.085,C6:E6) 9.Click your mouse pointer at the end of the NPV formula which appears in the formula bar. 10.Type + and select the cell that contains the year 0 cash flow amount. This will add the cash outflow that appears in cell B6 as a negative. =NPV(0.085,C6:E6)+B6

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Calculating IRR with Excel 2010 continued 2.Values is the range of cells that contains ALL of the cash flows from year 0 to the end of the useful life. Select the cash flows in cells B6 to E6. 3. Ignore Guess for most instances. 4. Click OK and the IRR of the investment will appear. 1. Click Formulas, then choose Financial. Then scroll to select IRR from the drop down menu. B6:E6 Because IRR is a decimal, format using 2 decimals and percentage number formatting, i.e., 4.31%

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8 The End

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