Formulas and Functions

Table Of Contents

Chapter 6 Financial Functions 13 3

Usage Notes

Â periodic-discount-rate is specied using the same time frame as the time frame used

for the cash ows. For example, if the cash ows are monthly and the desired annual

discount rate is 8%, periodic-discount-rate must be specied as 0.00667 or 0.667%

(0.08 divided by 12).

If cash ows are irregular, use the IRR function. Â

Example

Assume you are presented with the opportunity to invest in a partnership. Because the partnership is

still developing its product, an additional $25,000 and $10,000 must be invested at the end of the rst

and second years, respectively. In the third year the partnership expects to be self-funding but not

return any cash to investors. In the fourth and fth years, investors are projected to receive $10,000

and $30,000, respectively. At the end of the sixth year, the company expects to sell and investors are

projected to receive $100,000. In order to invest, you want to achieve an annual return of at least 10%.

Using the NPV function, you can determine the maximum amount you are willing to initially invest.

Based on the assumptions given, the NPV would be $50,913.43. Therefore if the required initial

investment is this amount or less, this opportunity meets your 10% goal.

periodic-rate Year 1 Year 2 Year 3 Year 4 Year 5 Sales

proceeds

=NPV(B2,

C2:H2)

0.10 -25000 -10000 0 10000 30000 100000