Net Present Value (NPV)

It is a discounted cash flow technique. The cash flows of a project over its life are discounted at a specified rate. The difference of present value of cash inflow and present value of cash outflow is the net present value. If the present value of total benefits is higher than the present value of total costs, the project is acceptable. The NPV must be positive.
  • Formula, tables and computer programs are available to calculate net present value.
  • The formula for calculating net present value is:

where, PV = Present value, k = discount rate, n = number of years

Advantages of NPV
  • It considers time value of money.
  • It considers cash flow over the total life of the project.
  • The discount rate is specified.
Disadvantages of NPV
  • The discount rate may not be realistic.
  • Its calculation is not easy.

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