- 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?
- Differentiate between cash flow and free cash flow.
- What is capital budgeting in finance?
- What are Operating cash flow in accounting?
- What is difference between cash flow statement and fund flow statement?
- What are Investing activities in cash flow in accounting?
- What are cash flow from Financial activities in accounting?
- What is difference between cash flow statement and balance sheet?
- How to define control flow statements in JShell in Java 9?
- Prepare cash flow statement for the following Balance sheet as on 31st March
- Difference between Substitution Cipher Technique and Transposition Cipher Technique
- Minimize Cash Flow among a given set of friends who have borrowed money from each other in C++
- What is difference between cash account and cash book?

- 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)

Advertisements