Diffrence between present values of future cash, Financial Management

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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.

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