Net Present Cost...NPC....formula

S

sssb2000

Well-known Member

Joined

Aug 17, 2004

Messages

1,169

• Oct 11, 2005

• #2

the formula was incorrect!!!

it should be:

Code:

=IF($Y13=0,0,(-1*FV(0.12,10,$Z13,$Y13,0)))

instead of:

Code:

=IF($Y13=0,0,(-1*FV(0.12,10,$Z13)+FV(0.12,1,$Y13)))

 

Upvote 0

NateO

Legend

Joined

Feb 17, 2002

Messages

9,700

• Oct 11, 2005

• #3

What does NPC stand for, Net Present Cost?

If so, you don't want FV, you want PV.

And you would not want to discount Cash Flows at time zero, that is the PV. Try the following:

=-PV(0.12,10,B2)+A2

Where A2 houses the down payment and B2 holds the end-of-period annuity.

I apologize if I'm not following.

 

Upvote 0

NateO

Legend

Joined

Feb 17, 2002

Messages

9,700

• Oct 11, 2005

• #4

sssb2000 said:

it should be:

Code:

=IF($Y13=0,0,(-1*FV(0.12,10,$Z13,$Y13,0)))

Click to expand...

Hmmm, I'm not sure that looks right either. What are you trying to calculate? The value as of which period?

 

Upvote 0

S

sssb2000

Well-known Member

Joined

Aug 17, 2004

Messages

1,169

• Oct 11, 2005

• #5

Nate,
thanks for your response!

that changes everything as far as the cost goes....
by NPC i do mean Net present Cost....

what's the Difference between FV (Future Value) and PV (Present Value)?

FV is how much your money will be worth lets say 10 years in the future...
and PV is how much a particular amount 10 years from now will cost today?

Are the above statements correct?
then if i need to know how much i need to give out of my pocket right now for a service, i would need to use PV. is that your logic?

 

Upvote 0

NateO

Legend

Joined

Feb 17, 2002

Messages

9,700

• Oct 11, 2005

• #6

Right. FV is the future value of a dollar. $1 10 years from now should be worth more, FV actually ramps up the dollar at your stated rate, 12% per period.

If you want to know the value of a future stream in terms of today's value, you want to discount the cash flows, at a compounding rate, which PV does. It's not just my logic, it's fundamental financial theory.

Here's an example where I've tied my use of the PV function back to the long-hand compounding discount involved:

Book2
	A	B	C	D	E	F
1		Initial Cost	Maintenance Cost	NPC
2		$300.00	$1,000.00	$5,950.22
3		$1,800.00	$1,000.00	$7,450.22
4
5		0	1	2	3	4
6	Flow 2	$300.00	$1,000.00	$1,000.00	$1,000.00	$1,000.00
7	PV	$ 300.00	$ 892.86	$ 797.19	$ 711.78	$ 635.52
8	NPV	$5,950.22
9
10	Flow 2	$1,800.00	$1,000.00	$1,000.00	$1,000.00	$1,000.00
11	PV	$ 1,800.00	$ 892.86	$ 797.19	$ 711.78	$ 635.52
12	NPV	$ 7,450.22
Sheet1

Note, my spreadsheet goes out to Column L, to accomodate 10 periods, this is a snippet.

So yes, use PV().

 

Upvote 0

S

sssb2000

Well-known Member

Joined

Aug 17, 2004

Messages

1,169

• Oct 11, 2005

• #7

Nate,
thank you for the explaination

i understand what you mean....but i don't know if i agree with this one sentence: " $1 10 years from now should be worth more, "

i thought the value of money depreciated!

 

Upvote 0

NateO

Legend

Joined

Feb 17, 2002

Messages

9,700

• Oct 11, 2005

• #8

$1 10 years from now is worth less in terms of today's money.

$1 today had better be worth more in nominal dollars 10 years from now or you have mismanaged your money. Per your economic model, it should be growing at 12%, at least, per annum as your investing it with this required return rate in mind.

Why are you using 12%? Theoretically, 12% represents your cost-of-capital, or opportunity cost. If you can't clear 12%, you're under water on your financing costs.

See the following:
http://www.google.com/search?q=present+value+discount


Edited by NPO: Clarified.

 

Upvote 0

S

sssb2000

Well-known Member

Joined

Aug 17, 2004

Messages

1,169

• Oct 11, 2005

• #9

12% was just a random number i chose.....not set in stone yet
thank you for all the help Nate! you're great!

 

Upvote 0

NateO

Legend

Joined

Feb 17, 2002

Messages

9,700

• Oct 11, 2005

• #10

12% isn't unrealistic, actually, pending your shareholders. The theory still holds while the rate might shift based on your cost of debt blended with your cost of equity.

You're welcome.

 

Upvote 0