Net present value and Nominal: Difference between pages

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(NPV).
1.
1.


The total [[present value]] of all of the cash flows of a proposal - both positive and negative.
Named, or 'headline'.  
 
For example, the expected future cash inflows from an investment project LESS the initial capital investment outflow at Time 0.
 
 
<span style="color:#4B0082">'''Example'''</span>
 
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<sup>-1</sup>
 
= $109.09m
 
 
NPV = -$100m +$109.09m
 
= +$9.09m


A nominal annual rate is a market rate named, or quoted, in a particular financial market.




2.
2.


In simple ''Net Present Value analysis'' the decision rule would be that:
A term which has <u>not</u> been restated to exclude the effects of inflation.  
 
(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.
This is the most commonly used basis for measuring and quoting financial information, also known as 'money terms'.  


(Contrasted with [[real]] terms.)


However this assumes the unlimited availability of further capital with no increase in the cost of capital.


A more refined decision rule is that:
3.


(1) All negative NPV opportunities should still be rejected; while
Very small.


(2) All positive NPV opportunities remain eligible for further consideration (rather than automatically being accepted).
For example, nominal damages or compensation would be a small amount, indicating that the party awarded them was technically in the right, but that the court did not approve of the case being brought to litigation in the circumstances.




== See also ==
== See also ==
* [[Capital rationing]]
* [[Aggregate money demand]]
* [[CertFMM]]
* [[inflation]]
* [[Discounted cash flow]]
* [[Nominal annual rate]]
* [[Economic value added]]
* [[Notional amount]]
* [[Internal rate of return]]
* [[Notional principal]]
* [[Investment appraisal]]
* [[Periodic rate]]
* [[Present value]]
* [[Real]]
* [[Residual theory]]
* [[Weighted average cost of capital]]

Revision as of 20:43, 2 November 2016

1.

Named, or 'headline'.

A nominal annual rate is a market rate named, or quoted, in a particular financial market.


2.

A term which has not been restated to exclude the effects of inflation.

This is the most commonly used basis for measuring and quoting financial information, also known as 'money terms'.

(Contrasted with real terms.)


3.

Very small.

For example, nominal damages or compensation would be a small amount, indicating that the party awarded them was technically in the right, but that the court did not approve of the case being brought to litigation in the circumstances.


See also

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