Net Present Value (NPV)

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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 -


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Discussions about Net Present Value (NPV).


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Does the Net Present Value (NPV) calculation uses cash inflows or profits?
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More Complex NPV Comparison: Interrelated Projects
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How do you Calculate NPV when Initial Investments are Unknown?
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Example of Net Present Calculation
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NPV of Partial Payments
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Missed Interest in NPV
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Calculating NPV for a Project
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NPV assumes Certainty of Cash Flows
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NPV with a Missing Cash Flow Figure
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🔥 NEW NPV with Only Costs & IRR
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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 (...)
 
 
 
 
Calculating Cost per Unit if Zero NPV without any Operating Costs Information
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NPV Cost Avoidance and Savings
I evaluating a capital expenditure project where 'stand alone' (location 1) the savings from the investment are low. Due (...)
 
 
 
 

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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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