@wikipediaA popular mechanism
One of measuring the discounted cash flow value of the profitthe efficiency metrics of Financial Investment, defined as a difference between total DCF and Initial Investment
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\mbox{NPV} = - \mbox{I}_0 + \mbox{DCF} = - \mbox{I}_0 + \sum_{i=01}^n \frac{R_\mbox{tiFCF}_i}{(1+r)^{t_i}^i} = R_0 + \sum_{i=10}^n \frac{R_\mbox{tiFCF}_i}{(1+r)^{t_i^i}} |
where
time stepst_time passed since the first investment ( assuming that = \rm \frac{Cash_{out} - Cash_{in}}{Cash_{in}}the , i.e. the return that could be earned per unit of time on an investment with similar risk, which is assumed constant over timeR_{ti} | --uriencoded--\mbox%7BFCF%7D_i = \rm |
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Cash_{in}(t) Cash_{out}(t)the net at time step t_mathinline| body | R_0 = - \rm Cash_{out}(t=0) |
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the volume of cash investment at initial time moment |
The main idea of NPV is to start wth the statement that value of cash today is higher than value of cash tomorrow because immediate cash can be safely invested today invested readily available investment market opportunities and start brining some profit.
In a sense,
NPV is showing a value of given investment as against a competitor in the form of the available market investment opportunities 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:
- Investment Projects with negative NPV should be rejected
- Investment Projects with higher NPV should have a financing priority over the projects with lower NPV
See also
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Economics / Investment / Financial Investment / Financial Investment Metrics
[ Profitability Index (PI) ] [ Discounted Cash Flows (DCF) ] [ Internal Rate of Return (IRR) ][ ΔNPV ]
[ Production NPV ]
