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
Net Present Value (NPV) Special Interest Group.
Special Interest Group (171 members)


Forum about Net Present Value (NPV).

WHEN to Invest? Investing at the Right Moment...
I have done a NPV calculation for an investment option. The problem I'm thinking about is not IF I should invest, it is WHEN to invest.
Its weird to make a calculation on a 10 years basis for opt...
5


Example of Net Present Calculation
Consider the following two investments:
Investment 1 requires a cash investment of $ 10,000 today and $14,000 two years from now. One year from now this investment will yield $24,000.
Invest...
2
2 comments


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 invoi...
2


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 to...
1


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 unkn...
0

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NEW NPV with Only Costs & IRR
Hi, I have been posed with the problem of trying to calculate an NPV, with only costs provided and an IRR. Additionally, costs are not incurred upfront, but by borrowing over each period at a given ra...
0
1 comments


NPV Cost Avoidance and Savings
I evaluating a capital expenditure project where 'stand alone' (location 1) the savings from the investment are low. Due to this, the NPV is low. And thus the project is not feasible.
However thi...
0


Calculating NPV for a Project
John owns a nursery school. He estimates that, with an extension, he would be able to sell the business as a going concern for $600,000 in six years time. Without the extension, he would expect to sel...
0



Best Practices


The toprated topics about Net Present Value (NPV). Here you will find the most valuable ideas and practical suggestions.

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 C...
43
6 comments


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?...
33
5 comments



Expert Tips


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Net Present Value vs IRR NPV vs IRR Two of the most important criteria for choosing between capital investment projects are net present value (NPV) and inte...


Present Value Tables Calculating PV Set of present value tables written in rich text format, compatible with MSWord and most other word processors. Include...


Capital Budgeting Calculate NPV, IRR, ROC Basic capital budgeting analysis for a project. Compute NPV, IRR and ROI. Spreadsheet by Aswath Damodaran....


Business Valuation  Company Valuation  Firm Valuation Business Analysis, Company Analysis  Firm Analysis This presentation elaborates on the valuation and analysis of companies and include the following sections:
1. Company ...


Analyzing Financial Feasibility Financial Feasibility Analysis, Project Selection, ROI, NPV, IRR Presentation about Feasibility Studies in the Financial Area. The presentation includes the following sections:
1. Fina...


How to Calculate NPV in MS Excel Basic Understanding of how to use Excel for calculating NPV The Net Present Value of an investment is the present value of the investment minus the amount of money it cost to buy i...


Net Present Value Diagram Investment Valuation Download and edit this 12manage PowerPoint graphic for limited personal, educational and business use.
Republishing in ...



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