Formula
Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms,
where
- t - the time of the cash flow
- i - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.); the opportunity cost of capital
- - the net cash flow (the amount of cash, inflow minus outflow) at time t. For educational purposes, is commonly placed to the left of the sum to emphasize its role as (minus) the investment.
The result of this formula is multiplied with the Annual Net cash in-flows and reduced by Initial Cash outlay the present value but in cases where the cash flows are not equal in amount, then the previous formula will be used to determine the present value of each cash flow separately. Any cash flow within 12 months will not be discounted for NPV purpose.
Given the (period, cash flow) pairs (, ) where is the total number of periods, the net present value is given by:
Read more about this topic: Net Present Value
Famous quotes containing the word formula:
“Ideals possess the strange quality that if they were completely realized they would turn into nonsense. One could easily follow a commandment such as “Thou shalt not kill” to the point of dying of starvation; and I might establish the formula that for the proper functioning of the mesh of our ideals, as in the case of a strainer, the holes are just as important as the mesh.”
—Robert Musil (1880–1942)
““It’s hard enough to adjust [to the lack of control] in the beginning,” says a corporate vice president and single mother. “But then you realize that everything keeps changing, so you never regain control. I was just learning to take care of the belly-button stump, when it fell off. I had just learned to make formula really efficiently, when Sarah stopped using it.””
—Anne C. Weisberg (20th century)
“But suppose, asks the student of the professor, we follow all your structural rules for writing, what about that “something else” that brings the book alive? What is the formula for that? The formula for that is not included in the curriculum.”
—Fannie Hurst (1889–1968)