About Net Present Value Formula
Over a period of time, the net present value formula determines NPV, which is the difference between the present value of cash inflows and outflows. The total current worth of all cash flows generated by a project, including the initial capital expenditure, is determined by net present value (NPV).
The net present value calculation is useful for determining which projects are likely to be profitable. As a result, the formula is as follows:
- N = Total number of time periods
- n = Time period
- Cn = Net cash flow at time period
- r = Internal rate of return
or
The difference between Present Value(PV) after the period of time duration of investment and the original amount spent can also be calculated to determine NPV, where the Present Value "PV" after time "t" for a rate of return "r" can be calculated as:
Present value, PV = cash value at time period /(1+rate of return)time period
Net Present Value Formula Rules
The net present value calculation employs several indicators to determine if an investment is beneficial or negative. These are the details:
- NPV > 0 = The current worth of money flowing in exceeds the current value of money going out. The investment is profitable since the amount earned exceeds the amount invested.
- NPV = 0 = When the amount of money earned from an investment equals the amount of money invested
- NPV < 0 = The return on investment is less than the initial investment.
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