NPV or Net Present Value is a financial metric in capital budgeting that is used to evaluate whether a

project or an investment is going to yield good return in future or not. It can be simply represented as the

difference between the present value of cash inflows and the present value of cash outflows. In the long run

a positive NPV value indicates good potential return over investment, while the negative NPV value means

that the investment is likely to loose money. Sometimes NPV is also referred as NPW or Net Present Worth.

For calculating NPV value using formula, you must already know the estimated value of discount rate (r) ,

all cash flow (both positive and negative) and the total initial invesment made by the company. The formula

for calculating NPV is as follows:

Where in the above formula :

N = total number of periods

n = positive integer

C = cash flow

r = discount rate

NPV = net present value

Suppose a company wants to start a new manufacturing plant in the near future. The company is looking forward

to invest a total sum of $100000 in it's setup at the beginnning, where the expected discount rate is 10

percent per-annum. This company has set it's goal for 5 years and for these 5 years the cash flows are -

$10000, $20000, $30000, $40000, $50000 respectively. Let's calculate the NPV and also evaluate whether the

company should pursue this decision or not.Lucknow Stock

The equation we have :

Let's apply all the known values in the NPV formula here.

The positive value of NPV suggests the investment is likely to return profit in the future. In this scenario

the NPV is 6525.88, so it seems that the investment is likely to yield profit.

If NPV > 0 , then the company should accept the investment decision or project. The positive

value of NPV is expected to increase the net worth of the company or it's shareholders.

If NPV , the company is expected to loose the money, so it shouldn't pursue that

investment or project.

If NPV = 0 , this will neither increase or decrease the value of the company or firm.

The discount rates (r) used in the formula above are likely to vary over timeSimla Wealth Management. The slight

increase or decrease in discount rate can impact the NPV value. Hence it's critical in decision making.

NPV is not effective in comparing two mutually exclusive projects which require different amount of

investment.

NPV may not give correct decision when comapring two projects with different time duration.

NPV calculation is based upon assumptions. It's prone to forcasting error. So, companies can't rely on only

NPV before making any investment decision. There's other financial tool too (like IRR or Internal rate of

return) which companies should consider for getting the clear pictures.

Calculating NPV can be a very daunting task, specially when you have so many positive and negative cash

flows. There's many tool available that can be used to calculate NPV. You can either use financial

calculators like Ti-83,Ti-84 and HP 12c calculator or can take the help from softwares like MS Excel. This

website, npvcalculator.info is such tool. It's an online NPV calculator.