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.

Mandalika

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Updated on: 24-Jul-2020

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