Net asset valuation and Net present value: Difference between pages

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imported>Doug Williamson
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imported>Doug Williamson
(Note expressly that the negatives are netted against the positives.)
 
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Net asset value.
(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.
 
 
<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
 
 
 
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).




== See also ==
== See also ==
* [[Net asset value]]
* [[Capital rationing]]
* [[CertFMM]]
* [[Discounted cash flow]]
* [[Economic value added]]
* [[Internal rate of return]]
* [[Investment appraisal]]
* [[Present value]]
* [[Residual theory]]
* [[Weighted average cost of capital]]

Revision as of 14:14, 17 November 2015

(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).


See also