# Net Present Value (NPV)

Net Present Value is the measure of potential increase/ decrease in the company’s or investors’ wealth as a result of undertaking any project. It is calculated as the sum of the present value of all project-related cash inflow, outflows, and initial investment. In order to calculate NPV we need the following information:

• All project-related cash flows (initial investment, residual value, income, expenses, etc.)
• Timeline of above cash flows
• Discount rate (also called the cost of capital i.e. the rate at which investor will be able to raise funds for the project)

Example:

A company is considering initiating a 5-year project. The project requires an initial investment of \$ 5,000,000 and thereafter annual cash outflows of \$ 800,000 to run operations. Expected revenue from the project is \$ 2,500,000 for years 1 and 2 while \$ 2,000,000 per year from year 3 onwards. The cost of capital is 10%. Assume that operational outflows and revenues will be received at the end of the respective year.

## One thought on “Net Present Value (NPV)”

1. Great article. Good to understand for everyone.

### What is Financial Ratio Analysis?What is Financial Ratio Analysis?

Ratio analysis is the quantitative analysis of financial information available in the financial statements. Financial ratios provide a detailed insight into the Company’s operational performance especially when analyzed over consecutive

### Profitability RatiosProfitability Ratios

In the above example, the company has a very good gross profit ratio and it is increasing each year which shows that either company is able to increase its

### Liquidity RatiosLiquidity Ratios

In the above example, Company has an unsatisfactory current ratio of 0.73 in the year 2013 which is improving in the years 2014 and 2015 owing to a decrease in