Monitoring & Evaluation

Net Present Value (NPV)

Sub: By Sub: To

Mashood-ur-Rehman (1619) Sir Saif-ur-Rehman

 What is Net Present Value (NPV)?

The Net Present Value (NPV) is a measurement of profit calculated the

difference between present values (PV) of cash outflows from the present
values of cash inflows over a period of time.
Incoming and outgoing cash flows can also be described as benefit and cost
cash flows. NPV is used in capital budgeting to analyze the profitability of a
projected investment or project.
Advantages:

• direct measure of the dollar contribution to the stockholders.

• It reduce “time value of money”
• It look at whole project from start to finish
• Accurate profit & cross forecast is achieved

Disadvantages:

• The disadvantage is that the project size is not measured.

• Accuracy of result depend upon external factor, if actual rate is 15% and we took 15% it
is wrong.
Example:

$2000 $3000 $3000 $4000

0
1 2 Outflow 3 4

Inflow

-$9000
The following formula for calculating:

PV = present Value
FV = Future Value
I = Interest
N = numbers of period.

i = 10%
i=10%
F𝑽
PV= 𝟏+𝒊 𝒏

−9000
PV= → -9000
1+0.1 0

20,00
PV= → 1818.18
1+0.1 1

3000
PV= → 2479.34
1+0.1 2

3000
PV= → 2253.94
1+0.1 3

4,000
PV= → 2732.05
1+0.1 4

NPV= −9000+ (1818.18 + 2479.34 + 2253.94 + 2732.05)

NPV= 283.51
• Positive results means the combined PV of all cash inflow exceeds the PV of cash
outflow.
• This project is profitable for company.