Net Present Value (NPV) Analysis

Definition:

Net Present Value or NPV analysis (also known as discounted cash flow method) is utilized to find the current value of future cash flows.

Uses:

Limitations:

NPV Index = NPV/Investment Required

Comparing the relative NPV Index of different investments will adjust for the differences in initial size of investment.

Demonstrations:

Step-by-step process:

       where

Ct = net cash inflow during the period t

C= total initial investment costs

r = discount rate and

t = number of time periods 

Template for capturing data:

Link to Template: NPV Template 

NPV of Project X 

Discount rate

10%

Factors

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Initial Investment

($15,000)

Returns

$  3,000

$  3,000

$  3,000

$  3,500

$  3,500

$  3,500

$  4,000

$  4,000

$  4,000

$  5,000

Present Value of Returns

$21,542

NPV of Project X

$6,543

Output representation and recommendations:

Examples:

(1) Computation of net present value:

*Value from present value of an annuity of $1 in arrears table.

Three additional examples can be seen at http://www.accountingformanagement.org/net-present-value-method/

Additional resources:

This content is provided to you freely by Ensign College.

Access it online or download it at https://ensign.edtechbooks.org/projectbasedinternship/net_present_value_npv_analysis_.