npv mystery

[dan]

I've discovered that I can get two different answers for
what I expected to provide the same result.

In both cases, I'm using the "manual" npv calculation
method of a/((1+b/12)^c)) applied to each period's
amount, and summing all these values for the NPV. A=the
period's amount, b=the discount rate, and c=the time
period value. The amounts are monthly amounts.

In case #1, I use an annual interest rate (e.g. 15%) and
use time period values of 0, 1/12, 2/12, 3/12...etc.

In case #2, I use a monthly interest rate (e.g., 15%/12),
and time periods of 0,1,2,3,..etc.

I expected the same answer for both cases, but they never
are. I've tried this for all sorts of interest rates,
and I always get a calc difference.

Anybody know why there is a difference, and if so, which
is the right method and which is wrong, and why?

thanks!

 

[Norman Harker]

Hi Dan!

15% applied to annual cash flows means that 15% is an annual effective
rate.

15%/12 per month is not 15% per annum effective. It's

=(1+15%/12)^12-1
Returns: 16.0754517722999%

You need to master the various methods of interest rate quotation and
the theory of equivalence of interest rates. I've got a tutorial file
and Addin on this problem available on direct application by
masochists only.
--
Regards
Norman Harker MVP (Excel)
Sydney, Australia
(e-mail address removed)
Excel and Word Function Lists (Classifications, Syntax and Arguments)
available free to good homes.

 

[dan]

Norman,

You are absolutely right! Thanks for the clear and
suscinct response.