Net Present Value

Net Present Value

Hi Clare<BR><BR>The present value is the value of cash received or paid in the foreable future and takes into account of any compounded interest earned over that period.<BR><BR>The net present value is the value of all cash flows discounted to the present and deducting any negative cash flows:<BR><BR>For example you have a potential investment in a piece of machinery for £220,000.00. The interest is charged at 10% per annum. Estimated cash receivable over the next 3 years is £100,000.00 per year.<BR><BR>Year Cash flow Discounted % Present Value<BR><BR>0 (220,000.00) 1.00 (220,000.00)<BR>1 (100,000.00) 0.909 90,909<BR>2 (100,000.00) 0.826 82,645<BR>3 (100,000.00) 0.751 75,131<BR><BR>Net present Value 28,685 (positive)<BR><BR>This represents a value of £28,685 positive, which means that there is surplus to cash at the present day. If this was a negative, then this would be a reason to reject an investment.<BR><BR>The discount percentage is calculated by taking 1/1.10 (10% interest) in year 1, then to calculate year 2 percentage you would take 0.909/1.10 and so on.<BR><BR>Hope this helps<BR>Lisa<BR><BR><BR><BR><BR><BR>

Net Present Value

Net present value is the difference between discounted cash outflow and the net cash inflow over the period of its used.<BR><BR>Remember NPV uses the discounted cash flow mothed<BR>(it could be 10%, 12%, 14% etc, this discounted factor is always given to you).<BR><BR>If cash outflow is < net cash inflow, NPV is positive, which means project can go ahead.<BR><BR>If cash outflow is > net cash inflow, NPV is negative, which means project should not be carry out.