Anyone have an explanation as to why the NPV function on my HP12c and Excel dont match for the same discount rate and CFs? Beginning period, end period? Any ideas? I would feel more comfortable if they were exactly the same.
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NPV in Excel assumes that your initial cash flow occurs at t = 1, even though it provides the NPV at t = 0.
If at all possible, it's better to avoid using Excel's financial formulas (with the exception of the XIRR add-in), since their inherent limitations can easily create calculation errors.
You're right. I just ran the NPV on my calc assuming t=0 CF=0 and it matched. That's bogus. How can excel get away with being so wrong? This f'd up excel method yields material differences. Bunk!
This is why almost nobody uses Excel's native finance formulas.
Excel is basically just a large, generic calculator, and not some sort of specialized financial modeling software.
Excel NPV (Originally Posted: 10/27/2011)
I am curious as to why has excel never changed the NPV bug. I understand that they inherited the bug from prior spreadsheets and had to keep it for compatibility issues, but couldn't they simply alter the calculation for later excel versions?
Mind elaborating on said bug? That is, provide example of this arising. Haven't encountered it yet and you've piqued my interest.
Just a simple error. For example, take a basic series of cash flows discounted at 10%: CF0:-$10000 CF1: $4000 CF2: $4000 CF3: $4000 CF4: $4000
The correct NPV would be $2,679.46 but the NPV function on excel returns $2435.87. Basically its discounting CF0 when it should not be. Whenever Im doing DCF I've always had to first add the initial CF then do a NPV of the remaining CFs in the formula bar.
Just curious as to why it has never been fixed.
Ok, know to what you refer. Don't think you're inquiring about the mechanics of it, but essentially +NPV() starts at year 1, and as we all know from our Taylor series and Newtonian Polynomials, that the inital function f(a) and susequently (x-a)^(0) are both one. And because these series are restricted to real or complex numbers, it's impossible to discount the zero year investment. In short there's no such thing as =(XYZ)/(1+10%)^(0), simply intial year investment.
Also believe it's programming / CS issue, that if my memory serves correct its a pretty hairy issue to solve as simple as it may seem.
The simple fix is to just not include that first cell in the NPV formula.
Just go like this: =NPV(0.1,CF1:CF4)+CF0
Right, so it is a programming issue then. I suppose there would be no need to change it if it can be easily adjusted. On a side note I wonder how many projects have been botched because of it.
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