NET PRESENT VALUE

MANUAL OF FINANCIAL CONCEPTS

NET PRESENT VALUE

It consists in bringing to present value the future cash flows of the investment project, discounted using a certain interest rate (“the discount rate”), and comparing them to the initial amount of the investment. As the discount rate, it is normally used the weighted average cost of capital (wacc) of the company which makes the investment.

NPV = – A + [ CF1 / (1+r)^1 ] + [ CF2 / (1+r)^2 ]+…+ [CFn / (1+r)^n ]

Whereas:

A: Initial investment.
CF: Cash flows.
n: Number of years (1,2,…,n).
r: Discount rate.
1/(1+r)^n: Discounting factor for an specific interest rate and number of years.
CFd.: Discounted cash flows.

If NPV> 0: the project is profitable.
If NPV< 0: the project is not profitable.

By the time of selecting between two projects, we will select the one with a higher NPV.
This method is considered as the best to analyze the profitability of a project.

Example of NPV calculation:

CONTACT US FOR ANY DOUBT OR TO ASK FOR A TAILOR MADE MODEL ADAPTED TO YOUR SPECIFIC NEEDS

PHONE

(34) 689 576 982

Este sitio web utiliza cookies para que usted tenga la mejor experiencia de usuario. Si continúa navegando está dando su consentimiento para la aceptación de las mencionadas cookies y la aceptación de nuestra política de cookies, pinche el enlace para mayor información.

ACEPTAR
Aviso de cookies