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
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  Calculating NPV for a Project
John owns a nursery school. He estimates that, wit...
     
 
  NPV Cost Avoidance and Savings
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  Calculating Cost per Unit if Zero NPV without any Operating Costs Information
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  NPV for Leased Equipment versus Purchased Equipment
Do any of you use NPV for a lease situation? I lea...
     
 
  WHEN to Invest? Investing at the Right Moment...
I have done a NPV calculation for an investment op...
     
 
  Missed Interest in NPV
(How) Can I include interest income forgone in an ...
     
 
  NPV with a Missing Cash Flow Figure
Is is possible to calculate NPV with a missing cas...
     
 
  Calculating NPV with Missing Data
How will I calculate the NPV if I only have the di...
     
 
  Operating Cash Flows
What is the NPV of a project that has cost of 52,1...
     
 
  NPV of $1 Million for a Project Means What
If a NPV of one project is $1 million, what does i...
     
 
  Example of Net Present Calculation
Consider the following two investments:
Inves...
     
 
  Does the Net Present Value (NPV) calculation uses cash inflows or profits?
Does the NPV calculation uses cash inflows or prof...
     
 
  More Complex NPV Comparison: Interrelated Projects
How would I compare 3 projects - two have an NPV =...
     
 
  Choosing between Investments Using a Comparison of NPVs
If I have 2 investments and I compare the NPV of b...
     
 
  How do you Calculate NPV when Initial Investments are Unknown?
In calculating NPV when initial investment is not ...
     
 
  NPV of Partial Payments
Suppose a business sells an average of $ 1000 per ...
     
 
  NPV assumes Certainty of Cash Flows
When using the Net Present Value method be careful...
     
 

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

Expert Tips - Net Present Value (NPV) Premium

Resources - Net Present Value (NPV) Premium

Net Present Value vs IRR

Two of the most important criteria for choosing be...
Usage (application): NPV vs IRR
 

Present Value Tables

Set of present value tables written in rich text f...
Usage (application): Calculating PV
 

Capital Budgeting

Basic capital budgeting analysis for a project. Co...
Usage (application): Calculate NPV, IRR, ROC
 

Business Valuation | Company Valuation | Firm Valuation

This presentation elaborates on the valuation and ...
Usage (application): Business Analysis, Company Analysis | Firm Analysis
 

Analyzing Financial Feasibility

Presentation about Feasibility Studies in the Fina...
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 pres...
Usage (application): Basic Understanding of how to use Excel for calculating NPV
 

Net Present Value Diagram

Download and edit this 12manage PowerPoint graphic...
Usage (application): Investment Valuation
 
 

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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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