Net Present Value (NPV) Calculator
The Net present value formula is in essence:
CF0 + (CF1 / (1+ r)^1 ) + (CF2 / (1+ r)^2 ) + (CFn / (1+ r)^n )
CF = Cash flow
CF0 = Initial Investment
n = year
r = discount rate (usually the Weighted Average Cost of Capital)
NPV Using Excel Formula
The following Excel formula gives us $357.95. Initial investment assumed here is -5.000. Income in Y1 = 1000, Y2 = 2000, Y3 = 3000. Discount rate is assumed to be 5%. Cash flows are expected to occur at the end of the period.
Applying the manual formula above would look as follows:
=-5000 + (1000/1.05) + (2000/1.05^2) + (3000/1.05^3)
Discount factor is a way to simplify the 1 / (1 + r)n calculation which is used to to multiply future value to give its present value. It makes it easier to know what the 1.05^2 is. Looking at the table below we could easily find that that is 0.907. Or 1.05^3 is 0.864.