Net discounted (present) value – NPV
Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.
Gauging an investment’s profitability with NPV relies heavily on assumptions and estimates, so there can be substantial room for error. Estimated factors include investment costs, discount rate, and projected returns. A project may often require unforeseen expenditures to get off the ground or may require additional expenditures at the project’s end. (see (Eliminating the Cash Deficit).).
Net discounted (present) value – NPV
Net present value is the amount of income that represents the estimate of the present value of future income. The net present value is the present value of future income, adjusted for the discount rate, less the present value of the initial (total) investment. Calculated by the formula:
Where:
CFn – net discounted cash flow in the n period,
In – investment in the n period (or total investment),
r – discount rate,
NCF – net cash flow (NCF), is used in the alternative NPV calculation formula.
The value of NPV must be positive :
- NPV > 0 – shows how much the value of the invested capital will increase;
- NPV = 0 – the project will not bring any profit or loss;
- NPV < 0 – shows losses as a result of the project.
☛ Note that the result of calculations is influenced by the discounting step chosen by the user, and other settings of the calculation parameters of investment indicators.
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