NPV Formula
NPV may be
calculated in two different ways
1.
NPV Formula For Equal Cash Flows
NPV for even cash flow is calculated by multiplying the cash
inflow with annuity factor and then deducting the initial investment. Annuity
factor either can be calculated by formula or maybe get from the annuity table.
The formula may be expressed as under
NPV = C x (Annuity Factor) – Initial investment
C= Cash inflows
Annuity Factor = 1-
(1+i)-n
I
NPV Formula Example for Equal Cash Flow
Company expects equal cash
flow $ 20,000 for 5 years against an investment o $ 60,000. Discount rate for
the investment is 13%. Calculate the net present value.
= 20,000 x 3.517
=$ 70,345
=$ 70,345- $ 60,000
= $ 10,345
2.
NPV Formula for un equal cash Flows
= [C (1+i)-n+ C(1+i)-n]-Initial Investment
C= Net cash flow during
the year
I= Desired rate of return
NPV Formula Example for Equal Cash Flow
Company
expects cash flow f $ 20,000 for first year and then increase $ 2000 per year
for 3 years .Investment for the project $ 40,000.Desired rate of investment is
13%. What would be net present value of project?
Solution
Year
|
Inflows
|
Discount
Factor
|
Present
Value
|
0
|
$ 40,000
|
1
|
($ 40,000)
|
1
|
$ 20,000
|
(1+.13)-1 =.884
|
$ 17,680
|
2
|
$ 22,000
|
(1+.13)-2=.783
|
$ 17,226
|
3
|
$ 24,000
|
(1+.13)-3=.693
|
$ 16,632
|
NPV
|
$ 11,538
|
