Financial modelling terms explained

Net Present Value (NPV)

The net present value is a financial statement that shows how much a cash flow is worth today.

What is the Net Present Value (NPV)?

The NPV is a calculation used to determine whether an investment is worth making. The NPV takes into account the investment's expected future cash flows and the time value of money, and calculates the present value of those cash flows. If the NPV is positive, the investment is worth making; if it's negative, the investment is not worth making.

How Do You Calculate the Net Present Value (NPV)?

The NPV of a series of cash flows is the present value of the cash flows discounted back to the present at a rate equal to the company's required rate of return. The NPV calculation takes into account the time value of money, or the fact that a dollar received today is worth more than a dollar received tomorrow.

The NPV calculation begins by calculating the present value of the cash flows in the first year. This is done by multiplying each cash flow by the discount factor for that year. The discount factor takes into account the fact that money received today is worth more than money received tomorrow.

The present value of the cash flows in the first year is then added to the present value of the cash flows in the second year, and so on. This sum is then discounted back to the present at the company's required rate of return. The resulting figure is the NPV for the series of cash flows.

What is the Difference Between the Net Present Value (NPV) and the Internal Rate of Return (IRR)?

The NPV calculation takes into account the time value of money, while the IRR calculation does not. The NPV calculation will give you the present value of all cash flows, both positive and negative. The IRR calculation will give you the annual rate of return that makes the NPV of all cash flows zero.

What's an Example of a Net Present Value (NPV)?

The NPV is a calculation used to determine whether an investment is worth making, by taking into account the time value of money. The NPV calculation compares the present value of the cash flows generated by the investment to the initial investment. Positive NPV values indicate that the investment is worth making, while negative NPV values indicate that the investment is not worth making.

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