Net Present Value (NPV)

Knowledge Center

   

Traditional valuation method. Explanation of Net Present Value.

Contents

Premium

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) Special Interest Group


Special Interest Group (104 members)


Net Present Value (NPV) Forum  

Recent topics

  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 t...
     
 
  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 upfron...
     
 
  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 ...
     
 

Best Practices - Net Present Value (NPV)
  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 w...
     
 
  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?...
     
 
  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?...
     
 
  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?...
     
 
  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...
     
 
  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?...
     
 



All you need to know about management


  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...
     
 
  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 (...
     
 
  Calculating NPV with Missing Data
How will I calculate the NPV if I only have the different annual income for 6 years business proposal?...
     
 
  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 n...
     
 
  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 selle...
     
 
  Missed Interest in NPV
(How) Can I include interest income forgone in an NPV calculation?...
     
 
  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 ...
     
 
  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 £5...
     
 
  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 in...
     
 
  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 cos...
     
 

Expert Tips - Net Present Value (NPV)



Advance yourself in business administration and management



Resources - Net Present Value (NPV)

Net Present Value vs IRR

 

Present Value Tables

 

Capital Budgeting

 

Business Valuation | Company Valuation | Firm Valuation

 

Analyzing Financial Feasibility

 

How to Calculate NPV in MS Excel

 

Net Present Value Diagram

 
 

News about Net Present Value Measuring


     
 

News about Npv Method


     
 

Videos about Net Present Value Measuring


     
 

Videos about Npv Method


     
 

Presentations about Net Present Value Measuring


     
 

Presentations about Npv Method


     
 

Books about Net Present Value Measuring


     
 

Books about Npv Method


     
 

More about Net Present Value Measuring


     
 

More about Npv Method


     



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

 


About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
© 2018 12manage - The Executive Fast Track. V15.0 - Last updated: 15-11-2018. All names ™ of their owners.