A common question is how do you calculate the net present value. Instead of digging into complicated formulas, best is if you replicate the calculation via the help of an Excel Model as its easier to understand.
The most common use of the net present value method is the Discounted Free Cash Flow Valuation where you can download an example DCF Valuation Model for free here and check the formulas. Also note, if you don’t want to forecast the cash flows till the end of your Excel sheet, you will need to calculate the terminal value.
Basically, all that you do is to take each year’s free cash flow and discount it back to the present value. As you can see below the formula is much easier to understand if you decompose it into the applied discount factors, where the more future cash flows will be discounted stronger than the one of the next year. If you run a valuation mid-year, you could also use half-year’s free cash flows and just apply a mid-year discount factor 180/360 days = 0.5 instead of 1 full year.
Why don’t you try and play around with the DCF Valuation Model for swift understanding? Simply replace the cells with the blue font for assumptions (inputs) and see the results (black font) which is automatically updated after you finish inputting all the needed data.