Question

i want to know how net present value is calculated

Answer 1

Answer:

The formula for net present value is:

NPV = Z1/(1+r) + Z2/(1+r)^2 - X0

where,

Z1 = Cash flow in time 1

Z2 = Cash flow in time 2

r = Discount rate

X0 = Cash outflow in time 0 (i.e. initial investment)

Explanation:

Suppose an organization has invested $1,000 today at a rate of 10% per annum. Now, this investment will make an amount of $100 as the interest yielding a total sum of $1,100 at a year's end. Therefore, the present value of $1,100 at 10% per annum will be $1,000. The initial amount invested is deducted to obtain a zero net present value profiting the project by repaying the original investment. Also, it ensures that the required rate of return is paid to the investor along with their initial investment.

To determine a net present value as good or bad first, you need to understand its meaning and role in an organization. The technique of NPV is usually used to evaluate an investment at the discount rate fixed for an investment. The calculation of NPV at the given rate of interest is a nominal value that an investor can accept. Thus, NPV analysis plays a crucial role in determining the value of an investment or project with a series of cash flows. Apart from the revenues and cost, NPV emphasizes the timing of each cash flow strongly influencing the present value investment.

Answer 2

The net present value (NPV) is a measure of the profitability of an investment.

It is calculated by taking the present value of the expected cash flows from the investment, and subtracting the initial investment cost.

The formula for calculating NPV is as follows:

NPV = ∑ (CF / (1+r)^t) - I

Where:

CF = cash flow

r = discount rate

t = time period

I = initial investment

For example, suppose you are considering an investment that has an initial cost of $100, and is expected to generate cash flows of $50 in year 1, $60 in year 2, and $70 in year 3. The discount rate is 10%. The NPV of this investment would be calculated as follows:

NPV = (50 / 1.1^1) + (60 / 1.1^2) + (70 / 1.1^3) - 100

= 45.45 + 54.05 + 63.04 - 100

= $62.54

This means that the investment would be expected to generate a profit of $62.54 over its lifetime

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