Net present value/ Discount cash flow

Net present value method

Calculates the total return on an investment taking into account the time value of money

• is the value of future money if you had it

  now (considering inflation and the potential

  for earning interest on investment capital or

  cost of finance on raising investment capital)

How to calculate NPV

Advantages of NPV

• Take into account changes in the

economic and financial climate e.g.

inflation

• Allows for future earnings to be

adjusted to present values and future

cashflows

• Easy to compare different projects

• Allows for effect of risk on estimated

future cash flows

Disadvantages of NPV

• It is difficult to calculate

• Discount factors could be incorrect

which makes the NPV inaccurate

• Difficult to set discount factors far

into the future, the longer into the

future we go, the less reliable the

discount factor