Write the difference between present value and net present value.

Banking & FinanceManagementCompanies/Organisations

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.

raja
Published on 24-Jul-2020 10:58:50
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