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December 5, 2008

What is NPV?

NPV is the acronym for net present value. Net present value is a calculation that compares the amount invested today to the present value of the future cash receipts from the investment. In other words, the amount invested is compared to the future cash amounts after they are discounted by a specified rate of return.

For example, an investment of $500,000 today is expected to return $100,000 of cash each year for 10 years. The $500,000 being spent today is already a present value, so no discounting is necessary for this amount. However, the future cash receipts of $100,000 for 10 years need to be discounted to their present value. Let’s assume that the receipts are discounted by 14% (the company’s required return). This will mean that the present value of the those future receipts will be approximately $522,000. The $522,000 of present value coming in is compared to the $500,000 of present value going out. The result is a net present value of $22,000 coming in. 

Investments with a positive net present value would be acceptable. Investments with a negative net present value would be unacceptable.

Learn more about present value calculations at Present Value of an Ordinary Annuity and Present Value of a Single Amount.

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Comments

7 Responses to “What is NPV?”

  1. Khatha on January 7th, 2009 1:02 am

    I have B.Comm Accounting and find this site so helpful. However, I would love it if the answers to the questions could be read without them ”disppearing” after a short time of their appearance.

  2. maria on January 15th, 2009 4:19 am

    thanks for the informations….but what could be the best investments that can double or triple my money in just few years?

  3. A.shukur on January 25th, 2009 2:36 am

    Dear sir/madam
    would you please elaborate NPN with more examples and more problem solutions
    this should be problem and solution
    thanks alot

  4. Brian on May 16th, 2009 2:02 pm

    Really very helpful site in discussing Benefit Cost models required for the PMP exam

  5. Thiba on September 3rd, 2009 2:16 am

    I have B.Comm Accounting and I believe this site is helpful as am about to grow in my career as well as to find my area of speciality as Accounting is vast

  6. Harshad on September 22nd, 2009 10:45 am

    Hello sir.I am always thankfull to u.becouse this site helped me to perform well in my job with the great appreciation from the chief.

  7. ric on October 18th, 2009 1:13 am

    Sir gud afternoon.thanks for your information on how to compute the npv.it means a lot to me. God bless.

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