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+--- Thread: Computation of NPV and IRR without year 0 (/showthread.php?tid=8467)
Computation of NPV and IRR without year 0 - Shafi - 07-31-2010
Dear members,
I have a situation where technically I don't have year o. The investment is done in the first year of operation in which the revenues are also earned. How do we deal with this situation in computation of NPV and IRR? It seems these computations assume that you have year 0 then followed by operating years!
Is there any guidance from this?
Kind regards
- alihassan1414 - 08-01-2010
just simply discount the net cash flow of year one( initial investment - cash inflows) with appropriate discount rate .....no need to take any amount in year 0...
- Shafi - 08-10-2010
Thanks Alihassan for your reply. So, it means my discounting factor in calculation of NPV will start at year one (1+r)raised to one, is in't it? what about NPV formular in Excel, does it consider this scenario? Will it be aesy to convince bankers if they don't find their traditionally starting point of year 0?
Kind regards
- fpaimran - 08-17-2010
Dear Shafi,
We discount the figure only due to incorporate the impact of time value of money. If you are using monthly cash flows you can discount using monthly equivalent rate. However, you are working on yearly cash flow you will not discount the year 0 so in year one discount factor will be 1 only or you can say first year which is also a year of operation will not be discounted because value of the money will be the same in first year. In subsequent year value of money will be decreasing and we will discount the value of subsequent years.