Net Present Value (NPV)

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Traditional valuation method. Explanation of Net Present Value.


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Net Present Value (NPV)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

  1. Calculation of expected free cash flows (often per per year) that result out of the investment
  2. Subtract / discount for the cost of capital (an interest rate to adjust for time and risk)

The intermediate result is called: Present Value.

  1. 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 Value-Based 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) Forum
  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 rate. Would it be incorrect to go ahead and use the ...
  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 sell it for $500,000 in six years’ time. A local buil...
  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 this project also leads to cost avoidance at another ...
  Calculating Cost per Unit if Zero NPV without any Operating Costs Information
How does one calculate the cost per unit from the following info?
Initial investment of R120M, R8M maintenance costs per year, R5M additional costs for each 1M units produced and 1.2M units produced yearly. 11% interest rate on the investment an...
  NPV for Leased Equipment versus Purchased Equipment
Do any of you use NPV for a lease situation? I lease equipment and am often asked about purchase versus lease
I do not have the customers cash inflows, but when I'd do this comparison of NPVs, the least negative of the two would be the one to go...
  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 option 1 (invest now) and compare it with option 2 (i...
  Missed Interest in NPV
(How) Can I include interest income forgone in an NPV calculation?...
  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?...
  Calculating NPV with Missing Data
How will I calculate the NPV if I only have the different annual income for 6 years business proposal?...
  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?...
  NPV of $1 Million for a Project Means What
If a NPV of one project is $1 million, what does it mean to an investor?...
  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.
Investment 2 requires a cash investment of $ 6,000 today...
  Does the Net Present Value (NPV) calculation uses cash inflows or profits?
Does the NPV calculation uses cash inflows or profits? Should I use the revenue generated by the project or the profit?...
  More Complex NPV Comparison: Interrelated Projects
How would I compare 3 projects - two have an NPV = $500,000 (over 9 years mixed stream of inflows and 20 years annuity, respectively) and one which is a lump of $490,000 cash right now?
  Choosing between Investments Using a Comparison of NPVs
If I have 2 investments and I compare the NPV of both. Which one I prefer? With the biggest NPV?...
  How do you Calculate NPV when Initial Investments are Unknown?
In calculating NPV when initial investment is not mentioned what should i do? Only cost and benefit from year 1 is given. What would be the power of (1+discount rate) 1 or 0?...
  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.
The situation is one...
  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...

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Best Practices - Net Present Value (NPV) Premium
  Re-evaluating an investment decision
Question: I am re-evaluating 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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Resources - Net Present Value (NPV) Premium

Net Present Value vs IRR

Two of the most important criteria for choosing between capital investment projects are net present value (NPV) and internal rate of return (IRR). Alt...
Usage (application): NPV vs IRR

Present Value Tables

Set of present value tables written in rich text format, compatible with MS-Word and most other word processors. Includes examples of how to use prese...
Usage (application): Calculating PV

Capital Budgeting

Basic capital budgeting analysis for a project. Compute NPV, IRR and ROI. Spreadsheet by Aswath Damodaran....
Usage (application): Calculate NPV, IRR, ROC

Business Valuation | Company Valuation | Firm Valuation

This presentation elaborates on the valuation and analysis of companies and include the following sections:
1. Company analysis and stock selecti...
Usage (application): Business Analysis, Company Analysis | Firm Analysis

Analyzing Financial Feasibility

Presentation about Feasibility Studies in the Financial Area. The presentation includes the following sections:
1. Financial Feasibility Analysis...
Usage (application): Financial Feasibility Analysis, Project Selection, ROI, NPV, IRR

How to Calculate NPV in MS Excel

The Net Present Value of an investment is the present value of the investment minus the amount of money it cost to buy in.
In this video 2 invest...
Usage (application): Basic Understanding of how to use Excel for calculating NPV

Net Present Value Diagram

Download and edit this 12manage PowerPoint graphic for limited personal, educational and business use. Republishing in intranets, websites, books, ma...
Usage (application): Investment Valuation


Net Present Value Measuring


Npv Method


Net Present Value Measuring


Npv Method


Net Present Value Measuring


Npv Method


Net Present Value Measuring


Npv Method

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

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