Financial Functions in excel

In finance, the net present value (NPV) or net present worth (NPW)[1] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity.

Important : Dont forget to consider the initial cash outflow.

In excel use the function as discussed below

=npv(rate , value 1 , value 2, ....)

rate - corresponds to the discount rate/interest rate. In case of using Free cash flow to firm in numerator then using weighted average cost of equity and debt as the rate .

Value 1 , 2 , 3 - Cash flows (Cash inflow should be positive, cash outflow should be negative)

Example:

Discount rate 10%
Cash flow 1 -300
Cash flow 2 200
Cash flow 3 200

NPV Rs. 42.82 =NPV(10%,-300,200,200)

The internal rate of return (IRR) or economic rate of return (ERR) is a rate of return used in capital budgeting to measure and compare the profitability of investments. It is also called the discounted cash flow rate of return (DCFROR) or the rate of return (ROR).[1] In the context of savings and loans the IRR is also called the effective interest rate. The term internal refers to the fact that its calculation does not incorporate environmental factors (e.g., the interest rate or inflation).

Discount rate 10%
Cash flow 1 -300
Cash flow 2 200
Cash flow 3 200

IRR 22% IRR(D10,D11,D12)