Net Present Value (NPV)
Net present value is one of the most reliable measure used in capital budgeting. It is the present
value of net cash inflows generated by a project less the initial investment on the project. The use
of discounted cash inflows means that net present value accounts for
time value of money
.
Before calculating NPV, a target rate of return is set which is used to discount the net cash
inflows from a project.
Calculation Methods and Formulas
The major component of NPV is the present value of net cash inflows which may be even (i.e.
equal cash inflows in different periods) or uneven (i.e. different cash flows in different periods).
Where net cash inflows are even, present value can be easily calculated by using the present
value formula of annuity. However if net cash inflows are uneven we need to calculate the
present value of each individual cash inflow separately. Thus we have two formulas for the
calculating of NPV:
When cash inflows are Even:
NPV = R ×
1 − ( 1 + i )
n
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 Spring '09
 Stangota
 Managerial Accounting, Net Present Value, cash inflows, $5,824 thousand, $3,411 thousand, $4,070 thousand, $8,320 thousand

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