Q. Diffrence between present values of future cash ?

The difference among the present values of future cash inflows generated by an asset and its cost is known as net present value.

• A financial asset or else a project which has a positive NPV create wealth for shareholders and thus are undertaken.
• Alternatively a financial asset or a project resulting in negative NPV must be rejected since it would reduce shareholder's wealth.
• If one out of a variety of projects is to be chosen the one with the highest NPV is adopted.

The NPV is able to be computed with the help of the following formula:

  A1                             A2                   An

W = ------ + ------ + ------- + -------  - C

(1+K)1                    (1+K)2                (1+K)n

W = Net Present Worth

A1, A2,--An = Stream of Cash Flows

K = Appropriate discount rate to calculate risk and time factors

C = Initial outlay to obtain an asset or pursue a course of action.