Question

Which items are necessary in calculating the net present value of a project?

Answer 1

$\huge\underline\mathfrak\orange{Answer}$

The following formula is used to calculate NPV:

$\begin{aligned} &NPV = \sum_{t = 1}^n \frac { R_t }{ (1 + i)^t } \\ &\textbf{where:} \\ &R_t=\text{Net cash inflow-outflows during a single period }t \\ &i=\text{Discount rate or return that could be earned in} \\ &\text{alternative investments} \\ &t=\text{Number of timer periods} \\ \end{aligned}$

NPV=

t=1

∑

n

(1+i)

t

R

t

where:

R

t

=Net cash inflow-outflows during a single period t

i=Discount rate or return that could be earned in

alternative investments

t=Number of timer periods



If you are unfamiliar with summation notation – here is an easier way to remember the concept of NPV:

$\begin{aligned} &\textit{NPV} = \text{TVECF} - \text{TVIC} \\ &\textbf{where:} \\ &\text{TVECF} = \text{Today's value of the expected cash flows} \\ &\text{TVIC} = \text{Today's value of invested cash} \\ \end{aligned}$

NPV=TVECF−TVIC

where:

TVECF=Today’s value of the expected cash flows

TVIC=Today’s value of invested cash



A positive net present value indicates that the projected earnings generated by a project or investment - in present dollars - exceeds the anticipated costs, also in present dollars. It is assumed that an investment with a positive NPV will be profitable, and an investment with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that only investments with positive NPV values should be considered.

Apart from the formula itself, net present value can be calculated using tables, spreadsheets, calculators, or Investopedia’s own NPV calculator.