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One of the efficiency metrics of Financial Investment, defined as a difference between total DCF and Initial Investment \mbox{I}_0:

\mbox{NPV} = - \mbox{I}_0 + \mbox{DCF} = - \mbox{I}_0 + \sum_{i=1}^n \frac{\mbox{FCF}_i}{(1+r)^i} = \sum_{i=0}^n \frac{\mbox{FCF}_i}{(1+r)^i}

where

n

total number of accounting periods 

i= 0, 1, 2, 3, ...

running number of accounting period (usually 1 year)

r

discount rate

\mbox{FCF}_i = \rm CashIn_i - \rm CashOut_i

free cash flow generated during the i-th accounting period

The main idea of NPV is that value of cash today is higher than value of cash tomorrow because immediate cash can be invested readily available investment market opportunities and start brining some profit.

NPV dictates that commercial project should not only be just profitable but instead should be on par with or more profitable than easily available investment alternatives.

The corporate investment policy usually dictates that:


See also


Economics / Investment / Financial Investment / Financial Investment Metrics

Profitability Index (PI) ] [ Discounted Cash Flows (DCF) ] [ Internal Rate of Return (IRR) ][ ΔNPV ]



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