Net present value/Tutorials
Net present value
The present value of an investment generating cash flows C during n years is given by:
- 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 .
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 .