net present value

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Net present value (NPV)

The present value of the expected future cash flows minus the cost.

Net Present Value

A measure of discounted cash inflow to present cash outflow to determine whether a prospective investment will be profitable. For example, if a dentist wishes to purchase a new dental practice, he may calculate the net present value over a number of years to see if he will recover his investment in a reasonable period of time. If the ask price for the dental practice is $500,000, this is the present cash outflow used in the calculation. If the discounted cash inflow over, say, two years, is greater than or equal to $500,000, then the investment will likely be profitable. See also: Present value.

net present value

The discounted value of an investment's cash inflows minus the discounted value of its cash outflows. To be adequately profitable, an investment should have a net present value greater than zero. For investment in securities, the initial cost is usually the only outflow.

net present value

see INVESTMENT APPRAISAL, DISCOUNTED CASH FLOW.

net present value

see DISCOUNTED CASH FLOW.

net present value

An analytical tool for evaluating whether or not to purchase an investment. The tool does not tell you if an investment is good or bad;it tells you if the investment will meet your predetermined objectives or not.

• Critical to defining your objectives is setting the equivalent of an interest rate you would like to earn on your initial cash investment. This is called the discount rate. The discount rate may change from investment to investment, depending on your assessment of the risk. The safest investment is an FDIC-insured savings account, but it returns the lowest interest rate. You, the investor, decide what rate you would like to earn. You use the net-present-value tool to calculate whether a particular investment will earn the rate you want.

• Having said all that, the official definition of net present value is as follows: using a preselected discount rate, net present value is the present value of all cash incomes, less the present value of all cash outflows (including initial investment). If this is not clear, it will become so with the example below.

• If the net present value is 0 or a positive number, the investor should go forward. If the answer is negative for the discount rate selected, then the investment should not be made because it will not meet the investor's objectives, not because it is a “bad investment” in the ordinary sense of that phrase.

• The Excel formula for present value is pv (rate, cashflow, cashflow, cashflow)
‘'Rate” is the cell with the interest rate the investor would like to earn. Each of the “cashflow” entries is a cell address for cash flows by the end of each year, such as year 1, year 2, year 3, and so on. If an asset is sold in a particular year, the net sales price (after expenses of the sale) is entered as part of the cash flow for that year. One flaw of the system is that it assumes all cash flows are received at year-end, when they are really received over time, but that is usually a relatively minor problem.

References in periodicals archive ?
An employer should measure the cost of healthcare-related termination benefits, including healthcare continuation under COBRA, by calculating the discounted present value of expected future benefit payments, in accordance with the following requirements, as applicable:
If the firm perceives the change in money supply to be permanent, on the other hand, it will compare the menu cost with the discounted present value of all future increments in profit in period t onwards.
As suggested by the models in Riew [1973] and Cebula [1979], the net discounted present value of migration from area i to area j, DPVij, consists of three major component parts:
Since the home price is equal to the discounted present value of the future rental equivalent, future declines in rents from their short-run peak will cause the discounted present value to decline from its initial increase given by equation (3).
However, the discounted present value of future earnings (PV) is computed using equation four and involves a nonlinear function of the earnings growth rate and interest rate.
Term lb] is the discounted present value of marginal existence values over the present and future generations.
But we aren't finished yet, because if the higher profit leads to a higher stock price, we tax that profit again when the stockholder sells his shares, even though the stock price merely reflects the discounted present value of the future profits that are already going to be taxed twice.
The carrying of a loan at a discounted present value when it is probable that the creditor will be unable to collect all amounts due under the terms of the loan is widely supported.
Hence, the price of a Ferrari is the discounted present value solely of the transportation services.
Most people concede that market value or discounted present value are essentially the same in initial measurement.
Discounted Present Value Per $1,000 Amortized Under Various Methods(1) Present Method Value Sum of the Digits (10 years) $708 Income Method (FASB), as Practiced (10 years)(2) $663 Declining Balance (10 years) $651 Income Method (FASB), in Theory (30 years)(3) $547 Straight-line (14 years, as proposed) $489 (1)Assumes a discount rate of 14 percent.
are typically based on the discounted present value of lost future wages.