Difference Between NPV and XNPV
NPV vs XNPV: Which is more Appropriate?
The terms NPV and XNPV would doubtless be familiar to any accountant or software spreadsheet aficionado. NPV and XNPV are both formulas used to derive cash flow. Computing for NPV or XNPV can be done two ways: by using a calculator, or using a pre-programmed spreadsheet. Even with the aid of a calculator, computing manually for NPV or XNPV would be time-consuming and prone to mathematical error. Using a spreadsheet such as the one in Microsoft Excel is much easier, because one would simply have to input the formula for NPV or XNPV on the formula bar, and enter values afterwards. Microsoft Excel can compute for either NPV or XNPV via its Financial Functions feature.
Most people who are not familiar with accounting or software spreadsheets would not know how to compute or differentiate between NPV and XNPV. It’s easy to misplace one for the other, since their inputs are similar. Both NPV and XNPV take into consideration values such as annual discount rate and periodic or monthly discount rate. However, they have a clear-cut difference. NPV stands for Net Present Value. This formula is used compute for investment returns between two payments. The NPV shows the present value of all future cash flows, both negative and positive, by using the discount rate as basis. The NPV assumes that payments to be made in the future are made on a regular basis, with equal time intervals.
The XNPV is a modified version of the NPV. It is also used to arrive at a Net Present Value, but with a unique twist: the formula assumes that the cash flows do not come in equal time intervals. In order to effectively differentiate between the two formulas, a few examples might come in handy. If one were to compute the present value of future returns between two payments on a monthly basis, then NPV can be freely used, as long as each payment is made at a regular interval, the end of the month. If the interval between two payments is exactly one year, then NPV would be able to determine the cash flow at a regular basis, for example, at the end of each month. Each investment return would have a strictly one-month interval before the next. However, if the payments are not made regularly, then the XNPV formula has to be utilized instead of NPV.
Despite their similarities regarding input values, NPV and XNPV would yield different results. How does one enter NPV or XNPV values in a spreadsheet? First, one should enter three values on the rows, or Y axis of the spreadsheet: year, cashflow, and discount rate. Next, one should indicate whether the interval between the two payments would be in months or years. The time intervals should be indicated on the columns, or X axis of the spreadsheet. Once the values are in the spreadsheet, one simply has to use Microsoft Excel’s Financial Functions feature do derive either the NPV or XNPV. For further information on how to use NPV or XNPV on Microsoft Excel, simply refer to the Help feature by pushing the F1 button, or refer to guides over the Internet.
1. NPV and XNPV are used to derive the net present value of cash flows between two payments.
2. The NPV and XNPV can be computed via Microsoft Excel’s Financial Functions featured. It can also be computed by using a calculator, although using a spreadsheet is easier and less prone to mathematical errors.
3. NPV assumes that payments to be made in the future are made on a regular basis, with equal time intervals.
4. XNPV, on the other hand, assumes that payments are not made on a regular basis.
5. Computing for the NPV and XNPV would yield different results even if the same input values are used.
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