A popular mechanism of measuring the discounted cash flow value of the profit
| NPV = \sum_{i=0}^n \frac{R_{ti}}{(1+r)^{t_i}} = R_0 + \sum_{i=1}^n \frac{R_{ti}}{(1+r)^{t_i}} |
where
n | total number of time steps |
|---|---|
t_i | time passed since the first investment ( assuming that t_0 = 0) |
r = \rm \frac{Cash_{out} - Cash_{in}}{Cash_{in}} | the discount rate, i.e. the return that could be earned per unit of time on an investment with similar risk, which is assumed constant over time |
R_{ti} = \rm Cash_{in}(t_i) - \rm Cash_{out}(t_i) | the net cash flow at time step t_i |
R_0 = - \rm Cash_{out}(t=0) | the volume of cash investment at initial time moment t_0 = 0 |
The main idea of NPV is to start wth the statement that value of cash today is higher than value fo cash tomorrow becasue immediate cash can be safely invested today 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 investmenet 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