Net Present Value (NPV)
Net present value (NPV) is a discounted technique, which considers the time value of money. NPV consider different period cash flow value differ in their values. So, estimated cash flow must be converted into present value. It can be defined as the difference between total present value and net cash outlay. It is determined as following.
Net present value (NPV) - Total present value - Net cash outlay
Calculation Of Net Present Value (NPV)
Illustration,
Suppose,
The net investment = $ 50,000
Cash flow per year = $ 16,000
Period(No. of years)= 5 years
minimum required rate of return = 10%
Required:Net present value (NPV)
Solution,
Net present value (NPV) = Total present value - Net investment
= (16000 x 3.972) - 50000 = $ 10,656
Decision Rules Of Net Present Value
A. If projects are independent
Accept the project with positive NPV.
Reject the project with negative NPV.
B. If projects are mutually exclusive
Accept the project with high NPV.
Reject other projects.
