Net present value pptx
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NPV is used to analyze the profitability of potential investments or projects. It compares the present value of cash inflows to the present value of cash outflows. If NPV is positive, the investment adds value to the firm and should be accepted. If NPV is negative, the investment subtracts value and should be rejected. To calculate NPV, expected future cash flows are discounted back to the present using the required rate of return, and summed. The example shows calculating NPV for a potential project with $100,000 initial cost and $30,000 annual cash inflows for 6 years, less $5,000 annual cash outflows. The NPV is positive $108,881, so the project should
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Net present value pptx
- 1. NET PRESENT VALUE Presentation By: Parth Purohit Megha Jagtap
- 2. What is NPV? NPV of the financial decision is the difference between the present value of inflows & the present value of outflows. NPV is an indicator of how much value an investment or project adds to the firm. Used for capital budgeting, and it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.
- 3. What NPV means? If It means Then NPV> 0 the investment would add value to the firm the project may be accepted NPV< 0 the investment would subtract value from the firm the project should be rejected NPV= 0 the investment would neither gain nor lose value for the firm We should be indifferent in the decision whether to accept or reject the project. This project adds no monetary value.
- 4. How to calculate NPV? FORMULA: Ct=cash inflow in the period t C0=cash outflow of today K=required rate of return T=time period
- 5. Example: This project will have an immediate cash outflow of $100,000 (which might include machinery, and employee training costs). Other cash outflows for years 1–6 are expected to be $5,000 per year. Cash inflows are expected to be $30,000 each for years 1– 6. All cash flows are after-tax, and there are no cash flows expected after year 6. The required rate of return is 10%.
- 6. Year Cash flow Present value T=0 -1,00,000/(1.10)0 -$1,00,000 T=1 30,000-5000/(1.10)1 $22,727 T=2 30,000-5000/(1.10)2 $20,661 T=3 30,000-5000/(1.10)3 $18,783 T=4 30,000-5000/(1.10)4 $17,075 T=5 30,000-5000/(1.10)5 $15,523 T=6 30,000-5000/(1.10)6 $14,112 TOTAL 1,08,881
- 7. The decision should be: Since the NPV is greater than zero, it would be better to invest in the project than to do nothing, and the corporation should invest in this project.