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
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