   
|
|
|
|
Net Present Value
|
Net present value (NPV) is a method for evaluating the profitability of an investment or project. The net present value of an investment is the present (discounted) value of cash inflows minus the present value of cash outflows. Here's and example of net present value: Suppose an investment requires an initial cash outflow of $5,000 and provides cash inflows of $4,000 in year 1 and $3,000 in year 2. Without using net present value, simply toting up the cash flows sums to +$2,000 (-$5,000+4,000+3,000). With net present value and setting the discount rate to 10%, the investment is worth $1,115.70. (Net present value can be calculated using the NPV function in Excel.) By recognizing the time value of money and equating dollars from different years, net present value makes it possible to evaluate long-term investments. Accurately estimating the cash inflows and outflows for the net present value calculation is tricky; selecting an appropriate discount rate for net present value is also difficult. Nevertheless, net present value is a valuable tool for analyzing capital projects and other investments.
Rate this Net Present Value definition...
|
|
Where is the market headed? The answer may surprise you. Find out
right now with the exclusive & Barron's recommended charts of Chart of the Day.
|
Popular Terms: EBITDA, liquidity ratio, 401a, deferred tax, command economy, 144a, per diem, margin rate, deferred revenue, required rate of return, cancelled check, open position, stock split, ex-dividend, implied volatility, in escrow, irrevocable trust, limit order, quality assurance, risk management, 1035 exchange, Key Rate Duration, class C shares, current ratio, Zero Cost Collar, 1031 exchange, wholly-owned subsidiary, VIX, reverse mortgage, retained earnings, phantom income, option premium, minority interest, labor relations, ex-dividend date, covered put, real GDP, LIBOR, inflation, dividends payable, diluted share, debt service coverage, balance sheet, APR, equities, average price per share, FICO score, FTSE, stock market close
|
|
|
|
