Net Present Value - are they any geniuses out there??

[Petal]

Hi, Do any of you mathematical geniuses out there have a SIMPLE formula for calculating Net Present Value (NPV)

for this example:

Purchase Price $500,000

Sale Price $720,000 at end of 4 years

Rent $12,500 P.A. in advance

Discounted Rate. 6.5%

What is the net present value????

 

[tess85]

Petal,

you can use the NPV function in excel.

=NPV(0.065,12500, 12500, 12500,720000)-500000+12500 as the rent is paid in advance

Though I prefer to work it out using pen and paper cos I'm always afraid of putting the wrong formula in. I'll need to look up my notes for that, though.. get back to you soon

IF rent is paid in arrears:
=NPV(0.065,12500, 12500, 12500,720000+12500)-500000, I think


PS. When you say "discounted rate" = 6.5%, do you mean the "discount" rate or the interest rate? If it's the discount rate, you might need to convert that into interest rate using interest rate i = d/(1-d)
http://en.wikipedia.org/wiki/Discount_rate

 

[Old Dog]

Npv

Hi Tess,

Thanks for your input.

Petal made that enquiry for me, and it is the discount rate.

I have tried 3 different formulas and two financial calculators, but I must be missing something, as I keep gettig a different answer

 

[tess85]

Ok, I'll get out my notes and have a shot at it. I suppose it's good revision for me anyway! stay tuned

 

[tess85]

Using Excel:
I think the first thing I would do is convert the discount rate into interest rate: i = d/(1-d) = 0.065/0.935 = 6.9519%.

then I would do a cashflow timeline
T = 0 -500,000 + 12,500
T = 1 +12,500
T = 2 +12,500
T = 3 +12,500
T = 4 +720,000

Therefore use the NPV formula

=NPV(0.069519,12500, 12500, 12500,720000)-500000+12500 as the NPV formula in Excel takes the interest rate, not discount rate.

= 95606.149

------------

by hand:

T = 0 -500,000 + 12,500
T = 1 +12,500
T = 2 +12,500
T = 3 +12,500
T = 4 +720,000

(-500,000 + 12,500) + 12,500/(1+i) + 12,500/(1+i)^2 + 12,500/(1+i)^3 + 720,000/(1+i)^4 = 95606.149

 

[Rob G.]

Just break it down into 2 components.

Rent = annuity due

Sale = future lump sum

Cheers,

Rob

 

[tess85]

By hand Method #2: (saves you from working out i. this method uses d and only d)

Cashflows:

T = 0 -500,000 + 12,500
T = 1 +12,500
T = 2 +12,500
T = 3 +12,500
T = 4 +720,000

(-500,000 + 12,500) + 12,500*(1-d) + 12,500*(1-d)^2 + 12,500*(1-d)^3 + 720,000*(1-d)^4 = 95606.149

 

[Petal]

Hi Tess,

Thanks so much for your hard slog, hubby has it now and it is because of all your efforts.

Mind you I don't understand a damm thing but luckily I don't have to

Thanks again Tess

 

[tess85]

no problemo sorry it took me a little while, a bit embarrasing as I'm meant to know this stuff back to front... i guess it shows that cramming isn't a way of retaining memory long-term!

 

[boods99]

Hi People
For the purpose of NPV in this scenario, the discount rate is in effect the same as the interest rate, it is merely the inverse of interest rate as you are finding the present value of a future series of cashflows. Therefore the discount rate will be 6.5%.
So with this the NPV of the above scenario, I get $105,278.57

For all you excel junkies out there;

=NPV(6.5%,12500,12500,12500,720000)+(-500000+12500)

Boods

 

[asdf]

Are we trying to calculate NPV of the profit here?