Net Present Value (NPV) Definition and example
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Net Present Value (NPV) Definition and example

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Net Present Value (NPV) Definition and example 


Net present value uses present value calculation and calculate total inflows and outflows of a project to calculate net results.
It is described as “present value of total benefits (revenue or income) minus the costs over many time periods”
If net present value is grater than zero, this means the project will make profit. Therefore, project with net present value higher than zero must be selected.
If it is a lot of projects in agenda of a company, projects with higher net present values should be selected. Because higher net present value means higher profit respectively.

Example of net present value (NPV) calculation.


Let us use the same pervious example for calculating present value (see

Present Value Definition, Calculator and Examples) and let us assume project have following costs:

1st cost $ 90000 in the beginning 
2nd cost $ 120000 by the end of 1st year
3rd cost $ 40000 by the end of 2nd year
Interest rate (r) = 10%
If we substitute these cost amount in present value formula, it will be:
1st cost’s PV = FV/ (1+ r)n = 90000 / (1+0.10)0 = $ 90000
2nd cost’s PV = FV/ (1+ r)n = 120000/(1+0.10)1 = $ 109091
3rd cost’s PV = FV/ (1+ r)n = 40000/(1+0.10)2 = $ 33058
Briefly, total cost = $ 250000 this will be spent as per project cost throughout the project.
NPV of total cost = $ 232.145.
Let us bring these cash inflows and outflows on the same table to see the net result.
The below table include the payment value of the instalments will be retrieved and present value of the project costs together.



1st instalment net present value grater than the cost at the beginning and in total the net present value is $ 10000.
The 2nd instalment, present value is lower than the cost in this year and this result with negative $ 18182.
The 3rd instalment, present value is grater than the cost in last year and their return a positive net present value as well.
If we calculate the net present value (NPV) of all years, we find the whole project will received $ 273554.
The total cost will be paid is $ 232149 and this make the net present value (NPV) as $ 41405.
Since the total net present value (NPV) is grater than zero, this project is profitable and can be initiated.

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