Easiest Way To Calculate The Net Present Value
Author : Ellaria Sandy | Published On : 11 May 2021
When you write a case study about the concept of net present value you will learn that it indicates value of money in a given time through regular fluctuation. These calculations are performed to ascertain the consequences of various investment related decisions. (Cost-Benefit Analysis, Foreign Direct Investment, antiderivative calculator, probability calculator)
- Net present value: definition
The basic concept of a net present value case study focuses on the fact that a sum of money has greater importance in the current situation than the future, mainly because the investment return of a given amount would be higher in the present day than the future.
For example, if Procter and Gamble invest a sum of money on a project, its return will be higher today than tomorrow.
You can forecast the upcoming cash flow percentage to some extent by calculating the net present value correctly. Three main factors affect the net present value, cash flow, rate of discount and the net amount of cash flow. However, you cannot calculate the perpetuity of a business or establishment based on the net present value.
- Understanding the concept
If you are offered $300 today, will you receive the money now to take it after a year?
Your obvious choice will be to take it today. It is because of the simple reason that the value of money, or specifically $300, will decrease in a year and give you lower investment returns.
Therefore Net Present value is calculated by comparing the total value of the monetary sum you receive today to the amount you receive in future. If you use this method, it will help you reach the anticipated value of financial investment.
- Net Present value: significance
Suppose a company like Procter and Gamble is planning to launch a new product in the market. The company must know and be familiar with the primary expenditure and the relative cash flow that the company expects over a given period. The net present value calculation result will help the company to analyse two components, whether it is feasible for the company to launch the product and whether it would be worth taking such a huge investment risk.
- Calculating the net present value
- Assess the primary investment amount for a project.
- Determine the lowest discount rate for a period.
- Establish the return value to the cash payment that will be guaranteed in the given period
- Now calculate the net present value using the formula NPV = C*t/ (1 + r)? – C where C*t is the return value after a specific period, C is the project cost, t is the time period, and r is the discount rate.
If the project's net present value is approximately the same as the investment, the investment risk is worthwhile.
The discussion above gives you a clear idea of the definition, concept, significance and procedure of calculating the net present value. You or a company should take the investment risk if the net present value is approximate to the investment.