NPV

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:30AM in AAT student discussion
Hi, Could someone explain to me about Net Present Values (NPV) i have been looking at the all weekend but still cannot grasp them. The BPP books go into very little detail.<BR>

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  • System
    System Posts: 100,534 🤖 Admin 🤖
    NPV

    Hi Soph,<BR><BR>Did you mean NBV(net book value) of fixed assets ? If not ,would you mind explain more in details.<BR><BR>Thanks<BR>Chaoliss
  • System
    System Posts: 100,534 🤖 Admin 🤖
    NPV

    No sorry I meant Net Present Value In the costing unit. I haver a task that includes payback periods etc and part of it is finding out the NPV of products<BR>
  • System
    System Posts: 100,534 🤖 Admin 🤖
    NPV

    Hi Soph,<BR>Thank you for your explaination. Unforuntantly i could not help, i have not involve this topic until next week i assum ,at the moment i am still in CVP analysis session,sorry for not helping you.<BR><BR>Chaoliss
  • System
    System Posts: 100,534 🤖 Admin 🤖
    NPV

    Technical Term:-<BR><BR>Net Present Value<BR><BR>A figure which represents the profitability of a project. It shows this by calculating the total of future cash inflows from a project, less cash outflows, inflation, and/or a required Rate of Return.<BR>Present Value Net Present Value (NPV) = Present Value (PV) - Amount Invested.<BR>It is generally accepted that if the Net Present Value of a project is positive, then it should be carried forward, whereas if it is negative, then it should not.<BR><BR>In slightly more laymans Terms:-<BR><BR>If a company initially outlays £10,000 for a project, you then have to calculate how long it will take to repay this, ie the cashflow from the sales less expenses.<BR>However, (this is where discounted cash flows come in), capital investment calculations know that money has a time value, ie what is worth £1 today wont be worth £1 next year. <BR>What the books show you is that if you invested the £1 into a building society, at rate of 10%, then you would gain 10% on the £1 each year, £1.10 at yr 1, £1.21 at yr 2 etc etc.<BR>You then need to do the calculation £1 x (100/110) (100 per cent, less that rate of interest) which equals 0.91p<BR>So you now know that you £1 in year on, would only be worth 91p <BR>The same calculation continues for years 2, 3 etc:- £1 x (100/110) x (100/110) = £0.83 etc<BR><BR>This then forms a way of calculating the NPV. as you incorporate the discount factor (from the calculation) to calculate the discounted cash flow.<BR>At the end of the required number of years, you are left with the NPV of the project/asset.<BR><BR>So the NPV is the value of cash outflow and inflow for a project, discounted to present day amounts.<BR><BR>If you would like some examples with more details, just let me know, and i will email you some study notes i have made.<BR>Hope i haven't confused you totally!<BR><BR>Shaz <BR><BR>This web page may help:-<BR>http://www.bized.ac.uk/timeweb/reference/using_experiments.htm
  • System
    System Posts: 100,534 🤖 Admin 🤖
    NPV

    Net present value is like taking all the inflows and outflows for a project and putting them in a tardis and bringing them to you today. This is because £100 received in a year's time is not worth as much as £100 today. So, all the future flows will be worth less and less if you "drag them" back to today.<BR><BR>What the "tardis" does is convert the cash flows by means of a discount factor. The larger the % used in working out the discount factor (which you dont have to do) the quicker the value of the money is lost.<BR><BR>You do your own "tardis" thing by multiplying the cashflow by the discount factor. Once you have done this you add up all the amounts of money that you have today and see how much you have. This gives you the net present value. Net because it is inflow and outflows and present because they have all been brought back to the present.<BR><BR>If you have a positive value overall then it is worth considering the project. If the NPV is negative then you should not consider the project. Effectively it is telling you that you are flushing money down the drain today.<BR><BR>Dr Who eat your heart out!! Hope this helped a bit.<BR><BR>

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