NPV - Revision history

Dirkjan at 19:25, 27 August 2020

2020-08-27T19:25:08Z

Dirkjan: Replaced content with "NPV Category:finance Category:M12 Category:Principles of Corporate Finance Category:Term"

2020-08-27T18:39:18Z

Replaced content with "NPV Category:finance Category:M12 Category:Principles of Corporate Finance Category:Term"

Dirkjan: Created page with "In Principles of Corporate Finance the concept of ''net present value'' or ''NPV'' is defined as a project's net contribution to wealth (..."

2020-08-25T07:40:48Z

Created page with "In Principles of Corporate Finance the concept of ''net present value'' or ''NPV'' is defined as a project's net contribution to wealth (..."

New page

In [[Principles of Corporate Finance|Principles of Corporate Finance]] the concept of ''net present value'' or ''NPV'' is defined as a project's net contribution to wealth ([[Present Value|Present Value]]) minus initial investments. [[NPV|NPV]] is a measure of the difference between how much an asset is worth and what it costs. When it is worth more than it costs, the project has a positive NPV and the cooperation goes ahead and invests. A very simple to understand interpretation of the NPV is that it is your net profit at the end of the investment period corrected for inflation.

Put in another way; the NPV = PV(expected benefit cash flows) ''minus'' PV (capital expenditure). The decision is to invest if the NPV > 0.

Net present value is calculated as present value plus any immediate cash flow:

<math>\text{Net Present Value (NPV)} = C_0 + \frac{C_1}{1+r}</math>

If <math>C_0</math> is negative the immediate cash flow is an investment or [[Cash Outflow|Cash Outflow]]. For example, if a dentist wishes to purchase a new dental practice, he may calculate the net present value over a number of years to see if he will recover his investment in a reasonable period of time. If the ask price for the dental practice is \$500,000, this is the present cash outflow used in the calculation. If the discounted cash inflow over, say, two years, is greater than or equal to \$500,000, then the investment will likely be profitable. For multiple varying discount factors and multiple years the formula becomes:

<math>NPV = C_0 + \sum{\frac{C_t}{(1+r_t)^t}}</math>

There are three points to make about NPV:
1) A dollar today is worth more than a dollar tomorrow
2) The NPV depends on the forecasted cash flows from a project and takes the [[Opportunity Cost|Opportunity Cost]]s into account
3) Because the present values are translated to 'dollars today' NPV's can be added up:

<math>NPV (A+B) = NPV(A) + NPV(B)</math>

See also:
* [[Present Value|Present Value]]
* [[IRR|IRR]]
* this

<html><a href="/static/files/MBI/Module%209/Exercize%20Arosa%20Brixen%20Chamonix.xlsx">excel sheet</a></html>

example for comparison:

[[Category:finance]]

[[Category:M12]]

[[Category:Principles of Corporate Finance]]

[[Category:Term]]

← Older revision		Revision as of 18:39, 27 August 2020
Line 1:		Line 1:
−	~~In [[Principles of Corporate Finance\|Principles of Corporate Finance]] the concept of ''net present value'' or ''~~NPV'' is defined as a project's net contribution to wealth ([[Present Value\|Present Value]]) minus initial investments. [[NPV\|NPV]] is a measure of the difference between how much an asset is worth and what it costs. When it is worth more than it costs, the project has a positive NPV and the cooperation goes ahead and invests. A very simple to understand interpretation of the NPV is that it is your net profit at the end of the investment period corrected for inflation.	+	NPV
−
−	~~Put in another way; the NPV = PV(expected benefit cash flows) ''minus'' PV (capital expenditure). The decision is to invest if the NPV > 0.~~
−
−	~~Net present value is calculated as present value plus any immediate cash flow:~~
−
−	~~<math>\text{Net Present Value (NPV)} = C_0 + \frac{C_1}{1+r}</math>~~
−
−	If <math>C_0</math> is negative the immediate cash flow is an investment or [[Cash Outflow\|Cash Outflow]]. For example, if a dentist wishes to purchase a new dental practice, he may calculate the net present value over a number of years to see if he will recover his investment in a reasonable period of time. If the ask price for the dental practice is \$500,000, this is the present cash outflow used in the calculation. If the discounted cash inflow over, say, two years, is greater than or equal to \$500,000, then the investment will likely be profitable. For multiple varying discount factors and multiple years the formula becomes:
−
−	~~<math>NPV = C_0 + \sum{\frac{C_t}{(1+r_t)^t}}</math>~~
−
−	~~There are three points to make about NPV:~~
−	~~1) A dollar today is worth more than a dollar tomorrow~~
−	~~2) The NPV depends on the forecasted cash flows from a project and takes the [[Opportunity Cost\|Opportunity Cost]]s into account~~
−	~~3) Because the present values are translated to 'dollars today' NPV's can be added up:~~
−
−	~~<math>NPV (A+B) = NPV(A) + NPV(B)</math>~~
−
−	~~See also:~~
−	* [[Present Value\|Present Value]]
−	* [[IRR\|IRR]]
−	* this
−
−	~~<html><a href="/static/files/MBI/Module%209/Exercize%20Arosa%20Brixen%20Chamonix.xlsx">excel sheet</a></html>~~
−
−	~~example for comparison:~~
−
	[[Category:finance]]		[[Category:finance]]

← Older revision		Revision as of 19:25, 27 August 2020
Line 1:		Line 1:
−	NPV	+	In [[Principles of Corporate Finance\|Principles of Corporate Finance]] the concept of ''net present value'' or ''NPV'' is defined as a project's net contribution to wealth ([[Present Value\|Present Value]]) minus initial investments. [[NPV\|NPV]] is a measure of the difference between how much an asset is worth and what it costs. When it is worth more than it costs, the project has a positive NPV and the cooperation goes ahead and invests. A very simple to understand interpretation of the NPV is that it is your net profit at the end of the investment period corrected for inflation.
		+
		+	Put in another way; the NPV = PV(expected benefit cash flows) ''minus'' PV (capital expenditure). The decision is to invest if the NPV > 0.
		+
		+	Net present value is calculated as present value plus any immediate cash flow:
		+
		+	<math>\text{Net Present Value (NPV)} = C_0 + \frac{C_1}{1+r}</math>
		+
		+	If <math>C_0</math> is negative the immediate cash flow is an investment or [[Cash Outflow\|Cash Outflow]]. For example, if a dentist wishes to purchase a new dental practice, he may calculate the net present value over a number of years to see if he will recover his investment in a reasonable period of time. If the ask price for the dental practice is \$500,000, this is the present cash outflow used in the calculation. If the discounted cash inflow over, say, two years, is greater than or equal to \$500,000, then the investment will likely be profitable. For multiple varying discount factors and multiple years the formula becomes:
		+
		+	<math>NPV = C_0 + \sum{\frac{C_t}{(1+r_t)^t}}</math>
		+
		+	There are three points to make about NPV:
		+	1) A dollar today is worth more than a dollar tomorrow
		+	2) The NPV depends on the forecasted cash flows from a project and takes the [[Opportunity Cost\|Opportunity Cost]]s into account
		+	3) Because the present values are translated to 'dollars today' NPV's can be added up:
		+
		+	<math>NPV (A+B) = NPV(A) + NPV(B)</math>
		+
		+	See also:
		+	* [[Present Value\|Present Value]]
		+	* [[IRR\|IRR]]
		+	* this
		+
		+	<html><a href="/static/files/MBI/Module%209/Exercize%20Arosa%20Brixen%20Chamonix.xlsx">excel sheet</a></html>
		+
		+	example for comparison:
		+
	[[Category:finance]]		[[Category:finance]]