Write the difference between present value and net present value.
The major differences between present value and net present value are as follows −
Present value
Sum of discounted value of cash flow at a particular discounting rate.
Measures future cash flows today.
Does not measures additional wealth.
Does not provide any information about incremental value of a project/investment.
Present value = Future value / (1 + r)^n.
Calculates present value of future cash flow.
Easier to use.
Uses time value of money concept.
Decision making by individuals.
Net present value
Sum of discounted value of future cash flows net of initial investments made by the company.
Measures value of a project.
Calculates additional wealth generated.
Calculates incremental value.
Net present value = present value of future cash flows – initial investment.
Relevant in making investment decisions.
Complex concept.
Derived from present value concept.
Mostly used by companies in making investment decisions.
Published on 24-Jul-2020 10:58:50
