Course outline / Financial functions
Lesson 70 of 75 · Advanced · 3 exercises
Is an investment worth it?
Net present value, internal rate of return and payback.
What you'll practise
- Net present value with NPV
- Internal rate of return with IRR
- Simple profit
Net present value with NPV
Money later is worth less than money now. NPV discounts future cash flows back to today at a chosen rate.
NPV treats its first value as arriving after one year, so leave the year-0 investment out and add it separately:
=NPV(rate, year1:yearN) + year0
In cell E2, work out NPV(D2, B3:B6) + B2.
Internal rate of return with IRR
IRR is the rate at which NPV is exactly zero: the project's own rate of return. If it beats your required rate, the project is worth doing.
IRR includes the year-0 cash flow in its range.
In cell E2, work out IRR(B2:B6).
Simple profit
Before discounting, check the simple total.
In cell E2, add up all the cash flows in B2:B6.
Try it in a real spreadsheet
Every step checks your answer instantly and tells you exactly what to fix.