ACCA AFM & FM students should be using the spreadsheet functions as much as they can.
The most used of these is the “NPV Function”, but be aware the title can be a little misleading. It does not give you the NPV directly.
The function is designed to give you the present value of future cash flows, with the first flow commencing in year 1 at a given cost of capital.
Hence if used to find the NPV of a project, a slight adjustment is required. That is to accrue for the negative flow at time 0.
For Example, for a three project at 10%:
“=NPV(10%, CF1,CF2,CF3)+CF0* “
*This being a negative value.
Keep in mind, the NPV function has its use elsewhere in the syllabus.
For instance, bonds are valued as the PV of the future cash flows received by the lender and discounted at the lender YTM.
For example, for a 4 year bond with a YTM at 3.22%
“=NPV(3.22%,CF1,CF2,CF3)”
Finally, the NPV function is more challenging to use if the initial future flow is not at year 1 but sometime later as appeared in a recent ACCA AFM exam question.
