Difference Between NPV and XNPV

Edited by Diffzy | Updated on: August 14, 2022

       

Difference Between NPV and XNPV Difference Between NPV and XNPV

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Introduction

Financial management is the fundamental part of all management. There is a well-acquainted term in finance, called ‘present value’.  The present value cites that the amount of money today is profitable more than the same amount in the future. “NPV” and “XNPV” – these two terms are correlated to the term “present value”.

The full form of NPV is Net Present Value and the full form of XNPV is the Net Present Value of an investment for payments or incomes at Irregular Intervals. Net Present Value defines the contrast between the present value of cash inflows and the present value of cash outflows over an amount of time. Conversely, XNPV refers to the value that returns the net present value of an investment bottomed on a discount rate and a set of future payments and income. Most people who don’t know much about software spreadsheets, wouldn’t know the dissimilarities between NPV and XNPV. Cash flow can be obtained through the formulas of NPV and XNPV. Numerating for NPV and XNPV can be accomplished in two ways: by using a calculator or a preorganized spreadsheet. Microsoft Excel spreadsheet is widely used to numerate NPV and XNPV as it is easier and more accurate rather than a calculator.

NPV vs. XNPV

NPV stands for Net Present Value whereas XNPV stands for Net Present Value of an investment for payments or incomes at Irregular Intervals. There are several differences to understand the dissimilarities between these two financial terms. Though both terms display the present value of all the future cash flows (positive and negative) using the discount rate NPV requires the total period to numerate it while XNPV uses the particular dates of expenses. XNPV is remodeled and more pinpointed version of NPV. Similarly, we can say that XNPV is more accurate compared to NPV. The discount rate and values are obtained for the calculation of NPV in Microsoft Excel. Conversely, a supplementary range of dates requires to be considered for calculating XNPV in Microsoft Excel. NPV numerates the net present value when the payments are in uniformed time intervals, XNPV is used when payments are non-uniformed. These are the major differences that we have figured out through this content.

Difference Between NPV and XNPV in Tabular Form

Table: NPV vs. XNPV

Parameters of Comparison

NPV

XNPV

Time 

NPV assumes that future cash payments take place at regular intervals. 

In the case of XNPV, the computation is done leading to the time interval between cash payments being irregular. 

General Formula

The total time count is obligatory in the formula of NPV.

NPVt=1 to T  = ∑  Xt/(1 + R)t – Xo

 

Instead of the time, different dates for expenses are obligatory in the formula of XNPV. 

XNPVt=1 to N  = ∑  Ci/[(1 + R)d x do/365]

The formula in Microsoft Excel

=NPV(rate, value1, [value2],…) where the rate is the discount rate and values are cash inflows or outflows. 

=XNPV(rate, values, dates) where the rate is the discount rate, values are cash inflows/outflows, and date is the date of the expense. 

Application

NPV is used in the calculator when payments are made in equal hiatus. 

XNPV is used when the dates of expense are given but the time gap is not the same. 

Accuracy

It is less accurate as compared to XNPV as the supposition of equal time is made. 

XNPV is more empirical and accurate. 

 

 

 

 

 

What is NPV?

NPV stands for Net Present Value which is used to obtain the net present value of cash flow between two payments. Both positive and negative future cash flows can be indicated through NPV. NPV presumes that future cash flows crop up at regular intervals. It is a very significant term in accounting. It demonstrates the dissimilarities between the existing value of net cash arrival and the existing value of the cash expenditure.

Different projects can be selected with the help of NPV. For individual projects, a project has been taken after its NPV is enumerated as positive. Otherwise, it is discarded if the project NPV is enumerated negative and remains indifferent towards assessing or scraping if the project NPV arrived at zero. For competing projects, the project having greater NPV has been selected as well as considered. Net present value with a positive sign marks that the roughly calculated earnings delivered by any investment opportunity or a project (in existing dollar denominations) exceed the projected expenditures (also in existing dollar values). Generally, any investment having positive NPV results is destined to be a profitable one, whereas one having negative NPV results would destine for an overall squandering. This concept exemplifies the Net Present Value Rule, designating that only those investments must be taken into consideration that have positive NPV results.

The formula for ascertaining NPV (when cash arrivals are even):

NPVt=1 to T  = ∑  Xt/(1 + R)t – Xo

Where,

  • X= total cash inflow for period t
  • X= net initial investment expenditures
  • R = discount rate, finally
  • t = total period count

The formula for ascertaining NPV (when cash arrivals are uneven):

NPV = [Ci1/ (1+r)1 + Ci2/(1+r)2 + Ci3/(1+r)3 + …] – Xo

Where,

  • R is the individuated return rate per period;
  • Ci1 is the combined cash arrival during the first period;
  • Ci2 is the combined cash arrival during the second period;
  • Ci3 is the combined cash arrival during the third period, etc…

Using NPV in Excel

  • Using NPV in the excel sheet is not complicated.
  • NPV Formula - Excel  

 NPV (Rate, Value1, Value2, Value3..)

  • The rate in the formula is the discount rate that is utilized in one period.
  • Value 1, Value 2, Value 3, etc. are the cash inflows or outflows at the climax of periods 1, 2, and 3, respectively.

NPV Example #1 – With Specified Predefined Cash Inflow

Suppose a company is enamored with examining the guesstimated viability of a key project that demands an early outflow of $30,000. Over the four years, the project seems to deliver revenues of $5000, $14,000, and $20,000, respectively. The projected discount rate expects to be 6.5%. From an initial glimpse, it seems that the investment returns are just about double the initial investment. But, the amount obtained over four years remains not of the similar value as the net amount earned today. Hence the accountant of the company ascertains the NPV in a distinctive way of recognizing the overall advantageousness whereas enumerating the decreased time value of roughly calculated revenues:

NPV Example 1 – Solution using Microsoft Excel

Finding the answer to NPV problems in Excel is very uncomplicated. First, we need to set down the variables in the standard format as given below with cash flow in one row.

In this example, we are given with a discount rate of a yearly discount rate of 6.5%. When we use NPV Formula, we initialize with $5000 (cash inflows at the end of year 1) and choose the range till $20,000 (corresponding to the cash inflows of year 3).

and choose the range until $20,000 (corresponding to the cash inflows of year 3)

0th year – 30,000

1st year – 5,000

2nd year- 14,000

3rd year- 20,000

Discount rate- 6.5%

The Present Value of Cash Flows (years 1, 2, and 3) is $35,105.3

Cash invested or the Cash outflow in Year 0 is $20,000.

When we deduct the cash outflow from the present value, we get the Net Present Value of $15,105.3

NPV Example 1 – Solution using Manual Calculation

To enumerate the Net Present Value, one should call up the following points:

  • Addition of the Present Value received
  • Deduction of the Present Value being paid

NPV = {$5,000/(1+.065)^1} + {$14,000/(1+.065)^2} + {$20,000/(1+.065)^3} – $30,000

= $3,595.03

What is XNPV?

The Excel XNPV function referred to a financial function that computes the net present value (NPV) of an investment. XNPV uses a discount rate and a series of cash flows that take place at irregular intervals.

Purpose

Compute the net present value for irregular cash flows

Return Value

Net present value

Syntax

=XNPV (rate, values, dates)

The XNPV function returns the net present value (NPV) of an investment relied upon a discount rate and a series of cash flows that occur at irregular intervals. Values symbolize cash flows and correspond to dates. Negative values symbolize cash paid out. Whereas, whereas positive values display cash received. The first date signifies the inception of the schedule of payments and must be the earliest date. Subsequent dates may take place in any order.

The conception of XNPV is interrelated to the idea of NPV. While calculating the value of XNPV, cash payments are not considered. This appears to be a better empirical option and it also increases the precision.

Notes

  • Rate is offered as a percentage (.12 for 12%).
  • Dates do not require to be in chronological order. But, the first payment date must be the earliest.
  • XNPV doesn’t provide a reduction in the initial cash flow.

The XNPV function uses the following three factors:

  • Rate – The discount rate to be used over the length of the period (see hurdle rate and WACC articles to learn about what rate to use).
  • Values (Cash Flows) – This is a batch of numeric values that symbolize the payments and income where:

Negative values are served as outgoing payments (negative       cash flow).

Positive values are served as income (positive cash flow).

  • Dates (of Cash Flows) – An arrangement of dates correlating with an array of payments. The date array should be of the identical length as the values array.

The formula used for enumerating XNPV is given below:

XNPVt=1 to N  = ∑  Ci/[(1 + R)d x do/365]

Where,

  • dx = the x’th expense date
  • d= the date for 0’th expense
  • C= the i’th expense

Using XNPV in Excel

The XNPV function in Excel recruits the following formula for enumerating the net present value of any investment opportunity:

XNPV Excel Formula

XNPV (R, Value Range, Date Range)

where,

R = discount rate for cash flows

Value Range = A set of numeric data, depicting income and payments, where:

  • Positive figures are specified as income;
  • Negative figures are specified as payments.

The first payment is discretionary and designates a payment or expense at the commencing of an investment.

Date Range = A range of dates identical to a series of expenditures. This remittance array should parallel with the array of contributed values.

Main Differences Between NPV and XNPV in Points

  • NPV stands for Net Present Value, whereas XNPV stands for Net Present Value of an investment for payments or incomes at Irregular Intervals.
  • Both NPV and XNPV display the present value of all the future cash flows (positive and negative) using the discount rate but NPV requires the total period to numerate it while XNPV uses the particular dates of expenses.
  • While NPV numerates the net present value when the payments are in uniformed time intervals, XNPV is used when payments are non-uniformed.
  • In Microsoft Excel, the discount rate and values are obtained for the calculation of NPV, while the supplementary range of dates needs to be considered for numerating XNPV. 
  • In XNPV, error messages are accepted since the dates are not specified in the exact format in excel sometimes which doesn’t happen in NPV. 
  • The value returned through the XNPV formula is more accurate as it doesn’t presume identical time internals like in the illustration of NPV.

Conclusion

NPV and XNPV both are very significant terms in accountancy. For freshers, these two terms may seem to carry out the same job. But there are several dissimilarities between these two terms and the utilizations are also different from each other. Though, NPV is less accurate as compared to XNPV as the supposition of equal time is made. Any investment having positive NPV results is destined to be a profitable one, whereas one having negative NPV results would destine for an overall squandering. This ideology is too important to keep in our minds. In a conclusion, we can say that this content will be effective for you for a better understanding of the differences between NPV and XNPV.

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"Difference Between NPV and XNPV." Diffzy.com, 2022. Fri. 09 Dec. 2022. <https://www.diffzy.com/article/difference-between-npv-and-xnpv-847>.



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