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November 5, 2007

What is the difference between Present Value (PV) and Net Present Value (NPV)?

Present value is the result of discounting future amounts to the present. For example, a cash amount of $10,000 received at the end of 5 years will have a present value of $6,210 if the future amount is discounted at 10% compounded annually.

Net present value is the present value of the cash inflows minus the present value of the cash outflows. For example, let’s assume that an investment of $5,000 today will result in one cash receipt of $10,000 at the end of 5 years. If the investor requires a 10% annual return compounded annually, the net present value of the investment is $1,210. This is the result of the present value of the cash inflow $6,210 (from above) minus the present value of the $5,000 cash outflow. (Since the $5,000 cash outflow occurred at the present time, its present value is $5,000.)

Present value calculations can be seen at Present Value of a Single Amount and Present Value of an Ordinary Annuity Net present value calculations can be seen at Evaluating Business Investments.

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Comments

7 Responses to “What is the difference between Present Value (PV) and Net Present Value (NPV)?”

  1. Vaibhav Athare on August 11th, 2008 2:22 am

    thanks a lot the info helps a lot in understanding the concept.

  2. Remmy on October 16th, 2008 9:28 am

    Thank you, this is really helpful.

  3. John on November 8th, 2008 10:24 pm

    Thanks. This is a good answer for a distinction I have wondered about for many years!

  4. kasukiya on November 13th, 2008 2:33 pm

    Thank u it is good but u didnt correctly calculated the nate present value

  5. Roy on March 25th, 2009 12:40 pm

    is the answer $6210 - 5000 = 1210?

  6. ACoach on March 25th, 2009 12:48 pm

    Yes, the answer is $1,210. I have now corrected my earlier incorrect amount. Thank you.
    Harold

  7. Ikudehinbu justina on May 28th, 2009 8:53 pm

    Thanks u’ve given me a clear insight on npv

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