I am new to this topic and confused too. How do I calculate Net Present Value when I have a total project period of 20 years but the cash in flow changes after 11.6 years and from 11.7 to 20th year, there is a different cash flow. I am programming this. I use the formula Rt/(1+i)^i where Rt is the cash flow and i is the interest rate. I calculate with the regular formula for the 1st 11 years and from 13 to 20 years. Again I use the formula above for 11.1 to 11.7 years and 11.7 to 12 years and add them all together. But I don't seem to be getting the right answer.
Divya – It’s not quite clear whether you are calculating the value of the NPV of irregular stream of payments or the FV of an ordinary annuity (inflows) (C * [((1+i)^n-1)/i)]) or the NPV of an irregular future stream of payments (outflows) (C*[(1+i)^n)]).
Under either scenario, your methodology is essentially correct in that you simply add the cash flow payments/streams from the two periods together for the holding period result. You can use a decimal power factor (^n) to calculate partial periods. It is unlikely that the difference between rounding from 11.6 to 12 or using the actual 11.6 power is significantly skewing your result.
Hello Raylan, Thank you for your answer. I figured where I was going wrong.
Using fractional years wasn't the best approach, atleast according to my program. I tried using monthly interest rates only for this fractional period, but that too produced results way off!! The best approach was like you suggested, to just change the cash flow on the 11th year. The program works just fine now. :)
Thanks again.
Hi, Divya
No problem with different cash flows and not even with different discount rates. Use this recursive equation:
PV_t = (PV_t+1+CF_t+1)/(1+DR_t+1). PV = presnt value; CF = Cash flow and DR = discount rate. With this formula you can forget of Excel functions that work only when interest rate is constant; this is not what happens in reality. Interest rates change for different reasons, one of them is inflation.
Moreover, if you have fractional years, don't worry. Usually projects or firms have a seasonal behavior and for that real life situation it is better to make monthly forecasts. After that you should convert montthly cash flows to yearly cash flows. Beware of this because when adding up to yearly forecasts, you in reality are adding money from different times (months) into a lump sum in December. You will find that PV of yearly CFs is different to PV of monthky CFs. In order to reduce that difference you have to accumulate monthly up to December, capitalizing them with the monthky discount rate. and then, discounting back the CF at the end of year with the yearly discount rate. It is not that difficult.
Hopefully these suggestions (and those from other colleagues)will improve your calculations.
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