Net Present Value??

[RichardS]

Hi all.

My boss has just thrown me a curly one. Not quite sure which formula to use, and these financial ones confuse me at the best of times.

What he wants to know is, if we rent a building out for a fixed monthly rent for 21 years, and assuming various interest and inflation rates, how much would need to be paid in advance to achieve the same outcome.

Currently I have
=PV(-(C11+C12)/12,C9,C10)
where C11 has the inflation rate, C12 has the interest rate, C9 has the number of payments and C10 the regular monthly payment. The result looks kind of OK, but I'd like some confirmation.

Any assistance would be greatly appreciated.

TIA

Richard

[paulyf]

Hi Richard

Just a couple of points:

a simple division by 12 does not convert an annual interest rate to a monthly rate. The formula to convert an annual rate to a period equivalent rate is:

r=(1+R)^1/n -1

where r = period equivalent rate
R = annual rate
n = number of periods in year (12 in your case - monthly)

Secondly, I'm not sure you need to amend the interest rate/cost of capital for inflation. Your organisation is paying a fixed amount over the period, so the interest rate already accounts for the time value of money.

Sorry if I've further confused you - but at least it may help stimulate debate.

Cheers - Paul

[paulyf]

Hi Richard

Just a couple of points:

a simple division by 12 does not convert an annual interest rate to a monthly rate. The formula to convert an annual rate to a period equivalent rate is:

r=(1+R)^1/n -1

where r = period equivalent rate
R = annual rate
n = number of periods in year (12 in your case - monthly)

Secondly, I'm not sure you need to amend the interest rate/cost of capital for inflation. Your organisation is paying a fixed amount over the period, so the interest rate already accounts for the time value of money.

Sorry if I've further confused you - but at least it may help stimulate debate.

Cheers - Paul