- Trending Categories
- Data Structure
- Networking
- RDBMS
- Operating System
- Java
- iOS
- HTML
- CSS
- Android
- Python
- C Programming
- C++
- C#
- MongoDB
- MySQL
- Javascript
- PHP

- Selected Reading
- UPSC IAS Exams Notes
- Developer's Best Practices
- Questions and Answers
- Effective Resume Writing
- HR Interview Questions
- Computer Glossary
- Who is Who

Net present value (NPV) is the value of all future cash flows over the entire life of an investment discounted to the present. It is one of the most reliable techniques used in capital budgeting, because it is based on discounted cash flow approach. It may be positive, zero or negative.

Present value of cash inflow > present value of cash outflow (NPV is positive and project is acceptable).

Present value of cash inflow = present value of cash outflow (NPV is zero and project is acceptable).

Present value of cash inflow < present value of cash outflow (NPV is negative and project is not acceptable).

- Time value of money is taken into consideration.
- It takes into consideration all the inflow, outflows and risk involved.
- Value of investment.

Different projects are not comparable.

Multiple assumptions.

Rate of return has to be determined, if higher/lower rate of return is assumed, it will show false profitability of the project and hence, result in wrong decision making.

$NPV=\sum_{I=1}^n\frac{R_N}{(1+l)^n}-X$

X = initial investment

R = net cash flow

N= year of net cash flow

I = discount rate

Initial investment = 1000000, discount rate = 9%

Year | Flow | Present value | Computation |
---|---|---|---|

0 | (1000000) | (1000000) | |

1 | 100000 | 91743 | 100000/1.09 |

2 | 250000 | 210419 | 250000/(1.09)^2 |

3 | 350000 | 270264 | 350000/(1.09)^3 |

4 | 265000 | 187732 | 265000/(1.09)^4 |

5 | 415000 | 26721 | 415000/(1.09)^5 |

NPV = 1000000 – (91743+210419+270264+187732+26721) => 29879 (POSITIVE)

- Related Questions & Answers
- What is Profitability index in discounted cash flow technique in capital budgeting?
- Explain about payback period in non-discounted cash flow technique in capital budgeting.
- What is Accounting Rate of Return in discounted cash flow technique in capital budgeting?
- Explain discounted cash flow analysis in merger and acquisitions
- What is Capital Cash Flow method?
- How to use Capital Cash Flow in valuing a project?
- What is Net Present Value (NPV) and what are the pros and cons of using NPV method in Capital Budgeting?
- Differentiate between cash flow and free cash flow.
- How to use Cash Flow Approach for Capital Structure Analysis?
- How does Working Capital affect the Cash Flow from Operations?
- Why is Discounted Cash Flow (DCF) Method not suitable for valuing stock options?
- What is Capital Budgeting?
- How does Capital Rationing help Capital Budgeting?
- What is capital budgeting in finance?
- Qualitative Factors in Capital Budgeting Decisions

Advertisements