Net Present Value Essay

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Net Present Value
Net present value (NPV) of a project is the significant change in an investor's wealth. It is the present value of total cash inflows generated by the project minus the initial investment made on the project. It is one of the most trustable measures used in capital budgeting as it accounts for time value of money by using discounted cash flows in the calculation.

Illustration 1 Even Cash Flows:
Net present value of a project has to be calculated which requires an initial investment of €245,000 and it is expected to produce a cash inflow of €60,000 each month for 12 months. Assumed that the salvage value of the project is zero. The target rate of return is 12% per annum.
Solution
Initial Investment = €253,000 …show more content…

It is similar to the net present value method.

Illustration 1 Even Cash Flows
Considering the project mentioned in Net Present Value illustration,
Case 1, Profitability Index = 1 + (NPV / Initial cost) = 1 + (319754/243000) = 1 + 1.315 approximately = 2.315 approximately

Illustration 2 Un-Even Cash Flows
Considering a project with negative Net Present Value, the profitability index of that company has possible chances to fall beyond 1. Profitability Index = 1 + (-2213/22100) = 1 + (-0.10013) approximately = 0.8998

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