 # Net Present Value (NPV)

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### 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

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 Expert Tips Information Sources Various sources of information regarding Net Present Value (NPV). Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops. Net Present Value vs IRRNPV vs IRRTwo of the most important criteria for choosing between capital investment projects are net present value (NPV) and inte (...) Present Value TablesCalculating PVSet of present value tables written in rich text format, compatible with MS-Word and most other word processors. Include (...) Capital BudgetingCalculate NPV, IRR, ROCBasic capital budgeting analysis for a project. Compute NPV, IRR and ROI. Spreadsheet by Aswath Damodaran. (...) Business Valuation | Company Valuation | Firm ValuationBusiness Analysis, Company Analysis | Firm AnalysisThis presentation elaborates on the valuation and analysis of companies and include the following sections: 1. Company (...) Analyzing Financial FeasibilityFinancial Feasibility Analysis, Project Selection, ROI, NPV, IRRPresentation about Feasibility Studies in the Financial Area. The presentation includes the following sections: 1. Fina (...) How to Calculate NPV in MS ExcelBasic Understanding of how to use Excel for calculating NPVThe 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 DiagramInvestment ValuationDownload and edit this 12manage PowerPoint graphic for limited personal, educational and business use. Republishing in (...)

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