The aim of this tutorial is to illustrate modelling approaches in calculating the Net Present Value (NPV) and Internal Rate of Return (IRR). The intended audience are those preparing valuation models who seek to evaluate the returns and profitability of an investment. This tutorial also assumes that the reader already has basic knowledge with the mathematical concept of both the NPV and IRR.
Applying NPV and IRR correctly
NPV and IRR are two of the most commonly used return metrics found in valuation modelling and analysis. In fact, the key outcome (and sometimes the only outputs that matter) are the NPV and IRR in a transaction.
However, they are quite often misused or miscalculated. Therefore, this tutorial will not only illustrate how to set-up the NPV and IRR calculations correctly but also discuss the common pitfalls in calculating them. The tutorial covers 6 different ways to calculate NPV, including from first principles and via two Excel functions and a further three ways to address IRR using Excel functionality.