Q. Explain Net Present Value Method?

Net Present Value (NPV) Method: - This process measures the Present value of returns per rupee invested. In this method present value of Institute of IT & Management cash outflows and cash inflows is computed and the present value of cash outflow is subtracted from the present value of cash inflows. The difference is described as NPV.

NPV= PV of Inflow - PV of Outflow

OR

NPV = [(Cash inflow in 1^st year x PVF ¹) + (Cash inflow in 2^nd year x PVF ²) + (Cash

inflow in 3rdyear x PVF ³) +-----------(Cash inflow in nth year XPVFn)] - [Initial cash outflow X PVF ⁰]

PVF¹ = Present Value Factor in 1^st year

PVF² = Present value factor in 2^nd year and so on.

If PVF is not given, we may calculate NPV as follows:

OR

NPV = [Cash inflow in 1^st year X 1/(1+r)¹ ] + [Cash inflow in 2^nd year X 1/(1+r) ²] +

[Cash inflow in 3^rd year X 1/(1+r)³ ] +--------[Cash inflow in n^th year X 1/(1+r)ⁿ ] - [Initial Cash outflow X 1/(1+r)⁰]

Accept-Reject Criteria:-

• If NPV is positive the project possibly accepted
• If NPV is negative the project mayn't be accepted.
• If NPV is zero the project may be accepted merely if non-financial benefits are there.

Posted Date: 8/3/2013 4:09:15 AM | Location : United States

Ask an Expert

Related Discussions:- Explain net present value method, Assignment Help, Ask Question on Explain net present value method, Get Answer, Expert's Help, Explain net present value method Discussions

Write discussion on Explain net present value method
Your posts are moderated

Write your message here..

Related Questions

Price-yield relationship in bonds, Typically in a bond, we find... Typically in a bond, we find an inverse relation between the price and the required yield. We know that the price of the bond is the present val

Borrowing funds via repurchase agreements, Repurchase agreement is a ... Repurchase agreement is a contract wherein the seller of a security agrees to buy back the same security from the purchaser at a specified price and time. It is also

Types of mortgages, Types of Mortgages 1. Traditional... Types of Mortgages 1. Traditional Mortgages 2. Non -  Traditional Mortgages 3.  Graduated-Payment Mortgages (GPMs) 4.  Pledged-Account Mortg

Compare and contrast the potential liability, Compare and contrast the pote... Compare and contrast the potential liability of owners of proprietorships, partnerships (general partners), and corporations. The sole proprietor has limitless liability for ma

Depreciation expense and investment in property plant, Use the excel spread... Use the excel spreadsheet to project the net income for Winnebago from assumptions about key revenue & expense items.   Use the following assumptions to evaluate the projected net

Swiss variable rate mortgage, A Swiss Variable Rate Mortgage (S... A Swiss Variable Rate Mortgage (SVRM) is a version of ARM which carries a coupon rate that a bank can change any time giving a notice of three m

State the terms- stock and share, Explain the terms- Stock and  Share ... Explain the terms- Stock and  Share Stock Ownership of a company represented by shares that are a claim on the company's earnings and assets. Share Unit of equity

Credit spreads and the valuation of non-treasury securities, It is not easy... It is not easy to determine the theoretical value of non-treasury securities. However, we can use the treasury spot rate for the valuation of non-treasury security.

Business finance, how to solve balance sheet? how to solve balance sheet?

What is meaning of perpetuity, What is meaning of Perpetuity If annuity... What is meaning of Perpetuity If annuity is expected to go on forever then it is known as a perpetuity and then the above formula reduces to: Present value: A/i Perpetuit