Net present value: Difference between revisions
imported>Doug Williamson (Note expressly that the negatives are netted against the positives.) |
imported>Doug Williamson (Standardise calculation presentation.) |
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NPV = -$100m +$109.09m | NPV = -$100m + $109.09m | ||
= +$9.09m | = +$9.09m | ||
Revision as of 15:35, 2 March 2016
(NPV).
1.
The total present value of all of the cash flows of a proposal - both positive and negative - netting off negative present values against positive ones.
For example, the expected future cash inflows from an investment project LESS the initial capital investment outflow at Time 0.
Example
A project requires an investment today of $100m, with $120m being receivable one year from now.
The cost of capital (r) is 10% per annum.
The NPV of the project is calculated as follows:
PV of Time 0 outflow $100m
= $(100m)
PV of Time 1 inflow $120m
= $120m x 1.1-1
= $109.09m
NPV = -$100m + $109.09m
= +$9.09m
2.
In simple Net Present Value analysis the decision rule would be that:
(1) All positive NPV opportunities should be accepted.
(2) All negative NPV opportunities should be rejected.
So the project in the example above would be accepted - on this basis - because its NPV is positive, namely +$9.09m.
However this assumes the unlimited availability of further capital with no increase in the cost of capital.
A more refined decision rule is that:
(1) All negative NPV opportunities should still be rejected; while
(2) All positive NPV opportunities remain eligible for further consideration (rather than automatically being accepted).
