Chapter 7 APPENDIX Using Excel to Make an NPV...
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Constructing an NPV profile of a project is a very useful way to really see the project’s IRR(s) and how the NPV of the project changes with the discount rate. Take Fredrick’s fertilizer project from Section 7.1. In the Excel screen shot below, the cash flows from that project are in black in cells D2 to H2. Cell B5 shows the NPV, taking the contents of cell B1 as the discount rate. The formula for doing this is shown just to the left of cell B2. Note that in order to make the NPV a dynamic function of whatever discount rate is entered into cell B1, you enter “B1” instead of “10%” where the formula takes this dis- count rate. For reference, we also compute the IRR in cell B3 and the formula for doing so is given just to the left of B3. With the cash flows set up and the NPV entered in cell B5 as a dynamic function of the discount rate, we are ready to use the Data Table function of Excel to calculate the NPV for a range of different discount rates. A data table shows us how the outcome of a formula (such as NPV) changes when we change one of the cells in the spreadsheet (such as the discount rate). To do this: 1. Enter the range of discount rates down a column, as shown below in cells A6 to A30. The placement of these rates is important. They must start in the cell below and to the left of the cell with the NPV. (Cell A6 is immediately below and to the left of cell B5.) 2. Highlight the area containing your range of discount rates and the NPV cell, as shown in the screen shot (cells A5 to B30). Part 3 Valuation and the Firm 240 Chapter 7 APPENDIX Using Excel to Make an NPV Profile
Transcript of Chapter 7 APPENDIX Using Excel to Make an NPV...
Constructing an NPV profile of a project is a very useful way to really see the project’sIRR(s) and how the NPV of the project changes with the discount rate. Take Fredrick’sfertilizer project from Section 7.1. In the Excel screen shot below, the cash flows fromthat project are in black in cells D2 to H2. Cell B5 shows the NPV, taking the contents ofcell B1 as the discount rate. The formula for doing this is shown just to the left of cellB2. Note that in order to make the NPV a dynamic function of whatever discount rate isentered into cell B1, you enter “B1” instead of “10%” where the formula takes this dis-count rate. For reference, we also compute the IRR in cell B3 and the formula for doingso is given just to the left of B3.
With the cash flows set up and the NPV entered in cell B5 as a dynamic function ofthe discount rate, we are ready to use the Data Table function of Excel to calculate theNPV for a range of different discount rates. A data table shows us how the outcome of aformula (such as NPV) changes when we change one of the cells in the spreadsheet (suchas the discount rate). To do this:
1. Enter the range of discount rates down a column, as shown below in cells A6 toA30. The placement of these rates is important. They must start in the cell belowand to the left of the cell with the NPV. (Cell A6 is immediately below and to theleft of cell B5.)
2. Highlight the area containing your range of discount rates and the NPV cell, asshown in the screen shot (cells A5 to B30).
Part 3 Valuation and the Firm240
Chapter 7 A P P E N D I X Using Excel to Make an NPV Profile
3. From the Data pull-down menu, select Table.
4. Since our discount rates are in a column, we are using a “Column input cell”instead of a “Row input cell.” In the Column input cell box, enter B1 or click onthe B1 cell. By doing this, you are telling Excel to recalculate the NPV bysubstituting the numbers running down the column into cell B1, which containsthe discount rate.
5. Click OK.
After clicking OK, the cells next to the range of discount rates will fill with the NPVs cor-responding to each of the discount rates, as shown in the screen shot below. To createan NPV profile graphing these NPVs as a function of the discount rates:
1. Highlight the discount rates and NPVs: cells A6 to B30.
2. Click on the Chart icon or select Chart from the Insert pull-down menu.
3. Choose XY(Scatter) as your Chart type and click on the Chart sub-type shownbelow in the screen shot.
4. Click Next to customize your chart further or click Finish to display the chart.
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