 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 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) Special Interest Group
|
|
|
|
Net Present Value (NPV) Education & Events
|
|
|
Advance yourself in business administration and management
|
|
|
 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
|
|
|
|
| |
|
Accelerate your management career
|
Compare with Net Present Value: Internal Rate
of Return | Payback
Period | Cost-Benefit
Analysis | Total Cost of Ownership
| CAGR |
Cost of Equity
Return to Management Hub: Decision-making & Valuation | Finance & Investing
More Management Methods, Models and Theory
|
|
|
|
Special Interest Group Leader
|
|
|
|
|
|
|
News about Net Present Value Measuring
Books about Net Present Value Measuring
More about Net Present Value Measuring