Amy Rose F.

Abalunan BA206
MBA Prof. Vincent Ray Boron

In finance, the net present value (NPV) or net present worth (NPW) applies to a

series of cash flows occurring at different times. The present value of a cash flow
depends on the interval of time between now and the cash flow. It also depends on
the discount rate. NPV accounts for the time value of money. It provides a method
for evaluating and comparing capital projects or financial products with cash flows
spread over time, as in loans, investments, payouts from insurance contracts plus
many other applications.
Net present value (NPV) is the difference between the present value of cash inflows
and the present value of cash outflows over a period of time. NPV is used in capital
budgeting and investment planning to analyze the profitability of a projected
investment or project.

The following formula is used to calculate NPV:

\begin{aligned} &NPV = \sum_{t = 1}^n \frac { R_t }{ (1 + i)^t } \\ &\textbf{where:} \\

&R_t=\text{Net cash inflow-outflows during a single period }t \\ &i=\text{Discount rate
or return that could be earned in} \\ &\text{alternative investments} \\ &t=\text{Number
of timer periods} \\ \end{aligned}NPV=t=1∑n(1+i)tRtwhere:Rt=Net cash inflow-
outflows during a single period ti=Discount rate or return that could be earned inalter
native investmentst=Number of timer periods

If you are unfamiliar with summation notation – here is an easier way to remember
the concept of NPV:

\begin{aligned} &\textit{NPV} = \text{TVECF} - \text{TVIC} \\ &\textbf{where:} \\

&\text{TVECF} = \text{Today's value of the expected cash flows} \\ &\text{TVIC} =
\text{Today's value of invested cash} \\ \end{aligned}
NPV=TVECF−TVICwhere:TVECF=Today’s value of the expected cash flowsTVIC=T
oday’s value of invested cash

A positive net present value indicates that the projected earnings generated by a
project or investment - in present dollars - exceeds the anticipated costs, also in
present dollars. It is assumed that an investment with a positive NPV will
be profitable, and an investment with a negative NPV will result in a net loss. This
concept is the basis for the Net Present Value Rule, which dictates that only
investments with positive NPV values should be considered.

Apart from the formula itself, net present value can be calculated using tables,
spreadsheets, calculators, or Investopedia’s own NPV calculator.

https://www.investopedia.com/terms/n/npv.asp