Compound interest formula

Tells us how much money we will have tomorrow, given interest rate and time
Money in
Time (years)
Rate (1%)
Money out

20.0
5
1%
21.0

Discounting in Excel
Tells us how much money tomorrow is worth to us today
Money out
Time (years)
Rate (1%)
Money in

60.0
5
10%
37.3

From DCF to NPV

Subtract the cost of the initial investment to get from DCF to NPV
DCF
Initial investment cost
Net present value (NPV)

37.3
20.0
17.3 Correct

Problems with the NPV formula

Subtracts the first cash flow you point it to: whether you want it to or not
a) wrong answer
Discount rate
Cash flows
Use of the NPV formula

10%
t0
t1
t2
t3
t4
-20.0
0.0
0.0
0.0
0.0
15.7 Wrong: NPV formula discounts the first 20m

b) correct answer
Discount rate
Cash flows
Use of the NPV formula
Initial investment cost
NPV

10%
t0
37.3
20.0
17.3 Correct

t1
0.0

t2
0.0

t3
0.0

t4
0.0

t5
60.0
first 20m

t5
60.0