Net present value: Difference between revisions

From Citizendium
Jump to navigation Jump to search
imported>Nick Gardner
mNo edit summary
imported>Nick Gardner
No edit summary
Line 2: Line 2:
{{EZarticle}}
{{EZarticle}}


The '''present value''' of an investment is the sum of its discounted annual cash flows. The concept  can be used to value an asset by stating that  present value of its future cash flows is the amount worth paying for it. Alternatively, it can be expressed as a criterion for an investment by requiring that the '''net present value''' (NPV) of its future cash flows, allowing for those of its initial investment, should be positive. The corresponding  '''net present expected value''' (NPEV) is the sum of the net present values of  alternative outcomes after weighting each by its probability of occurrence. The formulae used to calculate NPV and NPEV are set out on the tutorials subpage.  
The '''present value''' of an investment is the sum of its discounted annual cash flows. The concept  can be used to value an asset by stating that  present value of its future cash flows is the amount worth paying for it. Alternatively, it can be expressed as a criterion for an investment project by requiring that the '''net present value''' (NPV) of its future cash flows, allowing for those of its initial investment, should be positive. The corresponding  '''net present expected value''' (NPEV) is the sum of the net present values of  alternative outcomes after weighting each by its probability of occurrence. The formulae used to calculate NPV and NPEV are set out on the tutorials subpage.  




Calculations of NPV or NPEV are used for investment decisions by individuals and by companies and for [[cost-benefit analysis]] of proposals involving public goods. (It is generally preferred to the alternative [[discounted cash flow]] criterion). The [[discount rate]]s appropriate to those applications are discussed in the article on that subject. The subject of risk-limitation  in investment decisions is discussed in the article on [[financial economics]]
Calculations of NPV or NPEV are used for investment decisions by individuals and by companies and for [[cost-benefit analysis]] of proposals involving public goods. (It is generally preferred to the alternative [[discounted cash flow]] criterion). The [[discount rate]]s appropriate to those applications are discussed in the article on that subject. The subject of risk-limitation  in investment decisions is discussed in the article on [[financial economics]]

Revision as of 03:39, 26 February 2008

This article is a stub and thus not approved.
Main Article
Discussion
Related Articles  [?]
Bibliography  [?]
External Links  [?]
Citable Version  [?]
Tutorials [?]
 
This editable Main Article is under development and subject to a disclaimer.

The present value of an investment is the sum of its discounted annual cash flows. The concept can be used to value an asset by stating that present value of its future cash flows is the amount worth paying for it. Alternatively, it can be expressed as a criterion for an investment project by requiring that the net present value (NPV) of its future cash flows, allowing for those of its initial investment, should be positive. The corresponding net present expected value (NPEV) is the sum of the net present values of alternative outcomes after weighting each by its probability of occurrence. The formulae used to calculate NPV and NPEV are set out on the tutorials subpage.


Calculations of NPV or NPEV are used for investment decisions by individuals and by companies and for cost-benefit analysis of proposals involving public goods. (It is generally preferred to the alternative discounted cash flow criterion). The discount rates appropriate to those applications are discussed in the article on that subject. The subject of risk-limitation in investment decisions is discussed in the article on financial economics