Net present value/Tutorials

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	Tutorials relating to the topic of Net present value.

Net present value[edit]

The present value of an investment generating cash flows C during n years is given by:

${\displaystyle \text{V}={\displaystyle \sum _{t=1}^n}\frac{C_t}{(1+r{)}^t}}$

Where

• ${\displaystyle t}$ is the time of the cash flow
  
• ${\displaystyle r}$ is the investor's discount rate
  
• ${\displaystyle C_t}$ 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 [2].

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[edit]

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 P_y and present values V_y,

then the net present expected value is given by:

${\displaystyle \text{E}={\displaystyle \sum _{y=1}^n}{P}_y{V}_y}$

Internal rate of return[edit]

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 ^[1].