Net Present Value (NPV)

Knowledge Center



Summary, forum, best practices, expert tips and information sources.

78 items • 938.136 visits


Summary

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


Special Interest Group

Net Present Value (NPV) Special Interest Group.



Special Interest Group (171 members)

Discuss

Forum about Net Present Value (NPV).


 

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 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

Expert Tips

Advanced insights about Net Present Value (NPV). Here you will find professional advices by experts.


Information Sources

Various sources of information regarding Net Present Value (NPV). Here you will find powerpoints, videos, news, etc. to use in your own lectures and workshops.


Net Present Value vs IRR

NPV vs IRR
Two of the most important criteria for choosing between capital investment projects are net present value (NPV) and inte...

Present Value Tables

Calculating PV
Set of present value tables written in rich text format, compatible with MS-Word and most other word processors. Include...

Capital Budgeting

Calculate NPV, IRR, ROC
Basic capital budgeting analysis for a project. Compute NPV, IRR and ROI. Spreadsheet by Aswath Damodaran....

Business Valuation | Company Valuation | Firm Valuation

Business Analysis, Company Analysis | Firm Analysis
This presentation elaborates on the valuation and analysis of companies and include the following sections: 1. Company ...

Analyzing Financial Feasibility

Financial Feasibility Analysis, Project Selection, ROI, NPV, IRR
Presentation about Feasibility Studies in the Financial Area. The presentation includes the following sections: 1. Fina...

How to Calculate NPV in MS Excel

Basic Understanding of how to use Excel for calculating NPV
The Net Present Value of an investment is the present value of the investment minus the amount of money it cost to buy i...

Net Present Value Diagram

Investment Valuation
Download and edit this 12manage PowerPoint graphic for limited personal, educational and business use. Republishing in ...

Research Links

Automatically jump to further useful sources regarding Net Present Value (NPV).


News

News

Videos

Videos

Presentations

Presentations

Books

Books

Academic

Academic

More

More


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

Do you have a keen interest in Net Present Value (NPV)? Become our SIG Leader

 


About 12manage | Advertising | Link to us / Cite us | Privacy | Suggestions | Terms of Service
© 2022 12manage - The Executive Fast Track. V15.8 - Last updated: 26-9-2022. All names ™ of their owners.