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I'm working on a Net Present Value set of problems and would appreciate someone else's insight as my Excel calculations are coming up differently than other online calculators for NPV. I've read on chatboards that this is a common problem, but would like to see what you think the best source is for NPV calculators.

If you see after each question, I've put the answer I have arrived at with the work I've used to get there. It seems that I am coming up with the wrong answer and I'd like guidance as to what needs to be corrected in solving for NPV.

Here's the problem I'm trying to use NPV for: You identify a vacant piece of land zoned for retail use which you can purchase for $\$8.00$ million today (an amount which will need to be paid immediately). After detailed analysis you find that constructing retail strip mall will take one year and cost $\$3.5$ million (which will need to be paid at the end of Year 1). Once the building is completed (at the end of the first year), you plan on renting out the space at annual profit (after all expenses) of $\$750,000$ to be received at the end of each of the three years following the completion of the development. Finally, having established a track record, you plan on selling the retail strip mall for $\$13$ million at the end of the fourth year.

I used these as input:

Year 0 - 8 million (initial deposit) [outflow]

Year 1 -3.5 million (development costs) [outflow]

Year 2 750,000 (rent received) [inflow]

Year 3 750,000 (rent received) [inflow]

Year 4 750,000 (rent received) [inflow]

Year 4 13 million (sale of retail strip) [inflow]

Now, assuming your discount rate is 8%, what is the NPV of this project? I put this into an online calculator and got -603,508.49 but this is different from what Excel puts out. Is this the answer you arrive at?

Lastly, If I were to do the following problem, I get -513,584.83. Please let me know if you arrive at the same answer... You are also considering buying and holding the vacant land and selling it at the end of four years to another developer. Following this strategy would mean you’d miss out on the annual profits from the building, but you would avoid the construction costs. Assume there are no direct expenses associated with holding the land and that you expect to sell it for $11 million four years from today. Which plan should you pursue?

I put these numbers into the NPV excel formula:

Year 0 - 8 million (initial deposit) [outflow]

Year 1 0 (development costs) [outflow]

Year 2 0 (rent received) [inflow]

Year 3 0 (rent received) [inflow]

Year 4 0 (rent received) [inflow]

Year 4 11 million (sale of retail strip) [inflow]

Just wondering if you all have a website that calculates NPV accurately. I was using http://www.calculatorsoup.com/calculators/financial/net-present-value-calculator.php

Thank you for your help!

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In general you have to know how Exel or a online calculator work. Do they consider outflows/inflows at the end of the first year as outflows/inflows in the first year or in the second year ? In general the NVP is the value of the sum of all discounted outflows/inflows at the $\texttt{beginning}$ of the first year. Your table Looks right. The NVP of your first exercise is

$NVP=-8,000,000-\frac{3,500,000}{(1.08)}+\frac{750,000}{(1.08)^2}+\frac{750,000}{(1.08)^3}+\frac{750,000}{(1.08)^4}+\frac{13,000,000}{(1.08)^4}=104,298.03$

You have to say, if your calculation looks different or you just have miscalculated.

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  • $\begingroup$ I finally realized where my mistake was. I was putting $13,000,000/(1.08)^5 instead of ^4. Thank you for taking the time to write out the equation so that I could see my error! $\endgroup$
    – Josh
    Jul 30, 2015 at 0:59
  • $\begingroup$ @Josh You are welcome. $\endgroup$ Jul 30, 2015 at 15:36

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