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| − | 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.
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| − | Put in another way; the NPV = PV(expected benefit cash flows) ''minus'' PV (capital expenditure). The decision is to invest if the NPV > 0.
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| − | Net present value is calculated as present value plus any immediate cash flow:
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| − | <math>\text{Net Present Value (NPV)} = C_0 + \frac{C_1}{1+r}</math>
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| − | 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:
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| − | <math>NPV = C_0 + \sum{\frac{C_t}{(1+r_t)^t}}</math>
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| − | There are three points to make about NPV:
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| − | 1) A dollar today is worth more than a dollar tomorrow
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| − | 2) The NPV depends on the forecasted cash flows from a project and takes the [[Opportunity Cost|Opportunity Cost]]s into account
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| − | 3) Because the present values are translated to 'dollars today' NPV's can be added up:
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| − | <math>NPV (A+B) = NPV(A) + NPV(B)</math>
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| − | See also:
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| − | * [[Present Value|Present Value]]
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| − | * [[IRR|IRR]]
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| − | * this
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| − | <html><a href="/static/files/MBI/Module%209/Exercize%20Arosa%20Brixen%20Chamonix.xlsx">excel sheet</a></html>
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| − | example for comparison:
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| | [[Category:finance]] | | [[Category:finance]] |
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