Net present value/Tutorials

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Tutorials relating to the topic of Net present value.

Net present value

The present value of an investment generating cash flows C during n years is given by:

Where

  • is the time of the cash flow
  • is the investor's discount rate
  • is the cash flow (the inflow of cash) in year t

Tabulations of the factors to be applied each year at specified discount rates are to be found in many reference books [2].

Present value becomes net present value when C is taken to be the net cash inflow after allowing for outflows at the time of purchase of an asset or during the launch phase of a project.



Net present expected value

The net present expected value, E of a project having a probability P of a single outcome whose net present value is V is given by:

E = PV

Where there are multiple possible outcomes y = 1 ...n with probabilities Py and present values Vy,

then the net present expected value is given by:

Internal rate of return

The internal rate of return is that value of the discount rate, r in the above equations at which the present value V is zero. It is not recommended as an investment criterion because it is capable of producing inconsistent results [1].

  1. Gaylon E. Greer and Phillip T. Kolbe: Investment analysis for real estate decisions[1] (Google books extract), Dearborn Real Estate, 2003