The Essentials of Financial Modeling
The Essentials of Financial Modeling
Strategic Financial
Modeling
Using Excel
By Syed Nadeem
NET PRESENT VALUE (NPV)
Net Present Value (NPV) is the value of a specific stream of future cash flows
presented in today’s dollar. NPV help you to decide whether the project to
be accepted or rejected.
=NPV(rate,value1,[value2],…)
Return the NPV of the annual flows
By Syed Nadeem
XNPV
Question: How much to pay for an asset with irregular cash flows and un-
equal time period?
if you try to calculate an NPV of a project that generates cash flows at different
moments in time, you should use the XNPV function, which includes three
parameters: the discount rate, the series of cash flows and the range of dates
when the cash flows are received in time.
NPV XNPV
By Syed Nadeem
INTERNAL RATE OF RETURN (IRR)
IRR is one of the most popular method of evaluating potential projects.
IRR is the discount rate needed to make the NPV equal 0. The higher the IRR,
the more valuable the project is. It is useful when comparing between two
projects, or when comparing a project against a company WACC (Weighted
Average Cost of Capital).
=IRR(values, [guess])
Returns the internal rate of return for a series of cash flows represented by
the numbers in values.
By Syed Nadeem
INTERNAL RATE OF RETURN (IRR)
1. The IRR assumes that cash flows are reinvested at the IRR level;
2. Another major issue with IRR occurs when a project has different
periods of positive and negative cash flows. In these cases, the IRR
produces more than one number, causing uncertainty and confusion.
3. Cash flows are often reinvested at the cost of capital, not at the same
rate at which they were generated in the first place. IRR assumes that
the growth rate remains constant from project to project.
By Syed Nadeem
INTERNAL RATE OF RETURN (IRR)
By Syed Nadeem
MODIFIED IRR (MIRR)
The modified internal rate of return (MIRR) assumes that positive cash flows
are reinvested at the firm's cost of capital and that the initial outlays are
financed at the firm's financing cost.
By Syed Nadeem
XIRR (EXTENDED INTERNAL RATE OF RETURN)
=XIRR(values, dates, [guess])
Returns the internal rate of return for a schedule of cash flows that is not
necessarily periodic.
With regular IRR, it assumes all cash flows occur on Dec 31, but with XIRR, we
can tell Excel that the first cash flow is in the middle of the year. This has a
substantial impact on the internal rate of return calculation.
If you use the =XIRR() formula in Excel, then you have complete flexibility
over the time periods of the cash flows. In order to do this, enter two series
in your formula:
By Syed Nadeem
Stay Connected!