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.

3. 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

Forum Forum discussions about Net Present Value (NPV). Below you can ask a question about this topic, share your experiences, report a new development, or explain something. Start a new topic about Net Present Value (NPV) Share your knowledge here (or ask a question)   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?... 11   2 comments 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 opt... 5   Calculating NPV with Missing Data How will I calculate the NPV if I only have the different annual income for 6 years business proposal?... 4   4 comments 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. Invest... 2   2 comments 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 invoi... 2   Missed Interest in NPV (How) Can I include interest income forgone in an NPV calculation?... 1   1 comments 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?... 1   4 comments 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 to... 1   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 unkn... 0   🔥 NEW 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 ra... 0   1 comments 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, th... 0   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 produ... 0   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 thi... 0   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 sel... 0

Best Practices The best, top-rated topics about Net Present Value (NPV). Here you will find the most valuable ideas and practical suggestions. 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 C... 43   6 comments 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?... 33   5 comments 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?... 20   1 comments 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?... 19   2 comments 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? ... 16   1 comments

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