Scribd
Upload
23 views5 pages

Technical Paper ENSC 108

Uploaded by

James Raymond Razo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
23 views5 pages

Technical Paper ENSC 108

Uploaded by

James Raymond Razo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 5

NPV, or net present value, is how much an investment is worth throughout its lifetime,

discounted to today’s value. The NPV formula is often used in investment banking and
accounting to determine if an investment, project, or business will be profitable in the long run.

What Is NPV?

Net present value, or NPV, is the value of an investment discounted to its current value over the
course of its lifetime. In investment banking and accounting, the net present value (NPV)
calculation is frequently utilized to ascertain the long-term profitability of a project, firm, or
investment. Companies often use net present value in budgeting to decide how and where to
allocate capital. By adjusting each investment option or potential project to the same level, how
much it will be worth in the end.

NPV Formula

To calculate net present value, you need to determine the cash flows for each period of the
investment or project, discount them to present value, and subtract the initial investment from the
sum of the project’s discounted cash flows.

The NPV formula is:

In this formula:

● Cash Flow is the sum of money spent and earned on the investment or
project for a given period of time.

● n is the number of periods of time.

● r is the discount

Another NPV formula:


N = Total number of time periods

n = Time period

Cn = Net cash flow at time

r = Internal rate of return

OR

NPV can also be calculated by finding the difference between the Present Value (PV)
after the competition of time duration of investment and the initial amount invested
where the Present Value "PV" after time "t" for a rate of return "r" can be calculated as:

Interpreting Net Present Value

Net present value has three potential outcomes:

Positive NPV: A positive dollar amount means the project or investment may be profitable and
worth pursuing.

Negative NPV: A negative dollar amount means the project or investment is unlikely to be
profitable and should probably not be pursued.

Zero NPV: A net present value of zero means the project or investment is neither profitable nor
costly. A company may still consider projects and investments with an NPV of zero if the project
has significant intangible benefits, such as strategic positioning, brand equity, or increased
consumer satisfaction.
SAMPLE PROBLEMS:

1.A water company wanted to know their net present value of cash flow if they invest P100000
today. And their initial investment in the project is P80000 for the 3 years of time, and they are
expecting the rate of return is 10 % yearly. From the above available information, calculate the
NPV.

Given:

Amount investment = P100000

Money received after 3 years = P80000

Rate of return = 10% = 0.1

Using net present value formula,


Cash value at time period
Present value, PV =
(1+ rate of return)
80000
PV=
( 1+ 0.1 )3

PV=60105.18

Therefore, for 10% rate of return, investment has NPV = P39894.82

2.A manufacturing company is considering investing in new equipment to improve efficiency.


The initial cost of the equipment is P200,000. It is expected to generate annual savings of
P50,000 in operating costs over its 10-year useful life. The salvage value of the equipment at the
end of 10 years is estimated to be P20,000. The company's discount rate for such investments is
8% per annum. Calculate the Net Present Value (NPV) of the investment in the new equipment.

Given:

Annual operating cost saving = P50000

Salvage value at the end of 10 years = P20000

Year 1 to 10: P50000 (savings)

Year 10: P50000 (savings) + P20000 (salvage value) = P70000

Using discount rate of 8% per annum (0.08)

Using net present value formula,


Solution:

50000 50000 50000


Present value (PV) of year 1-9 savings: 1
+ 2
+ …+ 9
( 1+ 0. 08 ) ( 1+0.08 ) 1 ( 1+0. 08 )

7 0000
Present value of year 10 savings and salvage value:
( 1+ 0. 08 )10

Calculate each term:

5 0000
For year 1-9: PV = , where ranges from 1 to 9.
( 1+ 0. 08 )t

7 0000
For year 10: PV =
( 1+ 0. 08 )10

Calculate the NPV:

NPV = Initial investment – Present value of cash flows

Initial investment = P20000

Present Value of cash flows = PV of year 1-9 + PV of year 10

NPV = 200000 – (PV of year 1-9 + PV of year 10)

Decision:
If NPV > 0, the investment is financially justified. If NPV < 0, it is not justified.

3. An investor made an investment of $500 in property and gets back $570 the next year. If the
rate of return is 10%. Calculate the net present value.

Given:

Amount invested= $500

Money received after a year =$570

Rate of return = 10% or 0.1

Using net present value formula:

Cash value at time period


Present Value, PV =
( 1+rate of return )time period
$ 570
PV =
( 1+ 0.1 )1

PV = $518.18 - $500

Therefore, for 10% rate of return, investment has NPV= $18.18

You might also like