Net Present Value (NPV)

What is Investment Appraisal?

• The process of analysing whether investment projects are worthwhile

What is Net Present Value?

• Net present value (‘NPV’) calculates the monetary value now of a project’s future cash flows

The time value of money:

• Better to receive cash now rather than in the future

• Future cash flows are worth less

• Use discount factors to bring cash flows back to their ‘present value’

• Relevant discount factor determined by the required rate of return

Calculation of the present value of a future cash flow:

• Cash flow x discount factor = present value

Example of calculating NPV:

• Net present value (‘NPC’) calculates the monetary value now of a project’s future cash flows

  • Add together all the present values of future cash flows