How to Calculate Net Present Value
What is Net Present Value?
NPV discounts future cash flows to present value at required return rate. Positive NPV = value-creating investment decision.
Step-by-Step Guide
- 1Input cash flows and discount rate
- 2Calculate PV of each cash flow
- 3Sum to get total NPV
- 4Accept if NPV > 0
Worked Examples
Input
Invest $100k, receive $50k/year for 3 years, 10% discount rate
Result
NPV ≈ $24,343 (positive, accept project)
Compares to initial outlay
Common Mistakes to Avoid
- ✕Using wrong discount rate
- ✕Ignoring timing of cash flows
Frequently Asked Questions
What discount rate to use?
WACC for company projects, required return for personal investments.
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