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# How to calculate net present value using Net present value (NPV)?

**Following are cash flow for P1 and P2**

Year | 1 | 2 | 3 | 4 | 5 |
---|---|---|---|---|---|

Project 1 (P1) | 4000 | 4600 | 5800 | 7200 | 3500 |

Project (P2) | 4000 | 4800 | 3600 | 5400 | 3500 |

Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
---|---|---|---|---|

0.925 | 0.892 | 0.749 | 0.671 | 0.602 |

Present value Rs.1/- @10% (discounted factor) using present value table

## Solution

The solution is stated below −

**For Project 1 (P1) −**

**Initial investment = Rs. 35000/-**

** **

Year | Discounted factor | Returns | Net present value |
---|---|---|---|

1 | 0.925 | 4000 | 3700 |

2 | 0.892 | 4600 | 4103.2 |

3 | 0.749 | 5800 | 4344.2 |

4 | 0.671 | 7200 | 4831.2 |

5 | 0.602 | 3500 | 2107 |

25100 | 19085.6 |

** **

**Present value = Rs.19085.6/-**** **

Return on investment = (25100-19085.6)/35000 => 0.17184 => 17.184%** **

**For Project 2 (P2) −**

** **Initial investment = Rs. 23000/-

** **

Year | Discounted factor | Returns | Net present value |
---|---|---|---|

1 | 0.925 | 4000 | 3700 |

2 | 0.892 | 4800 | 4281.6 |

3 | 0.749 | 3600 | 2696.4 |

4 | 0.671 | 5400 | 3623.4 |

5 | 0.602 | 3500 | 2107 |

21300 | 16408.4 |

Present value = Rs.19085.6/-** **

Return on investment = (21300-16408.4)/23000 => 0.21268 => 21.268%

Hence, from the above calculations:

Return on investments for P2 is more than P1

So, project P2 is selected.

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