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}]
PVF^{1} = Present Value Factor in 1^{st} year
PVF^{2} = Present value factor in 2^{nd} year and so on.
If PVF is not given, we may calculate NPV as follows:
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:-