What
is Net Present Value? Definition
The Net Present Value (NPV) of an investment (project) is the difference
between the sum of the discounted cash flows which are expected from the investment,
and the amount which is initially invested. It is a traditional valuation
method (often for a project) used in the Discounted
Cash Flow measurement methodology, whereby the following steps are undertaken:
Steps in the calculation of Net Present Value
 Calculation of expected free cash
flows (often per per year) that result out of the investment
 Subtract / discount for the cost of capital (an interest rate to adjust
for time and risk)
The intermediate result is called: Present Value.
 Subtract the initial investments
The end result is called: Net Present Value.
Therefore NPV is an amount that expresses how much value an investment
will result in. This is done by measuring all cash flows over time back towards
the current point in present time.
If the NPV method results in a positive amount, the project should be undertaken.
Limitations of Net Present Value
 Although NPV measurement is widely used for making investment decisions,
a disadvantage of NPV is that it does not account for flexibility / uncertainty
after the project decision. See Real
Options for more information.
 Also NPV is unable to deal with intangible benefits. This inability
decreases its usefulness for strategic issues and projects. See
IC Rating for more information.
Book: S. David
Young, Stephen F. O'Byrne  EVA and ValueBased Management: A Practical Guide..

Book: Aswath Damodaran
 Investment Valuation: Tools and Techniques for Determining the .. 
Book: James R.
Hitchner  Financial Valuation: Applications and Models 

NPV for Leased Equipment versus Purchased Equipment
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WHEN to Invest? Investing at the Right Moment...
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NPV with a Missing Cash Flow Figure
 Is is possible to calculate NPV with a missing cash flow figure? E.g. the expected cash flows for a 5 year project at 2% with initial investment of £5000 pounds are £1000, £2500, £2300, £1700 and unknown. Can't this be done?...





Operating Cash Flows
 What is the NPV of a project that has cost of 52,125 and net cash flows of 12,000 per year for 8 years with a cost of capital of 12 percent?...





Example of Net Present Calculation
 Consider the following two investments:
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NPV of Partial Payments
 Suppose a business sells an average of $ 1000 per month to a group of 200 customers on Net 30 terms. What would be the financial benefit to the seller if those customers each paid 1/30th of the invoice each day for 30 days.
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NPV assumes Certainty of Cash Flows
 When using the Net Present Value method be careful: this calculation assumes certainly in the forecasted future cash flows. For strategic longer term projects this assumptions is often not valid in today's volatile markets and uncertain business envi...





Reevaluating an investment decision
 Question: I am reevaluating an investment decision from 2004   where the initial investment was made. If I wanted to look at the investment today would I need to take the future value of the past CFs and investment into todays dollars and then re ...







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Compare with Net Present Value: Internal Rate
of Return  Payback
Period  CostBenefit
Analysis  Total Cost of Ownership
 CAGR 
Cost of Equity
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