1. XNPV Function
We've seen how to use the NPV function with and without mid period
discounting to calculate net present value in Excel.
Another tool that can be used is the XNPV function,
which can add even greater accuracy to the results as it's not limited
by the same assumptions as the NPV function,
namely that cash flows occur at regular intervals.
Instead, the XNPV function uses specific dates that correspond to each cash
flow being discounted. The XNPV formulas syntax in Excel has the following
components: One, the discount rate, two, cash flow values for a certain
number of periods, and three, dates that correspond to the periodic cash
flows. And should be noted that the XNPV function does not discount the
initial cash flow, this is in contrast to NPV,
which discounts all cash flows. That being said, since XNPV does not discount
the first cash flow, we might need it to,
then we would enter a zero value at the valuation date.
We will demonstrate this further in our DCF model.
Mid period discounting can also be easily applied when using XNPV. The function
syntax is the same, all we have to do is to adjust the
dates to the mid points of their respective periods.
For example, with annual cash flows, the midpoint could be assumed to be
July 1st of each year instead of December 31st.
Now, let's take a look at a related concept, the internal rate of
return.
2. Let's practice!