Net Present Value (NPV) Formula
NPV calculates the total present value of all future cash flows minus the initial investment. A positive NPV means the investment creates value.
Net Present Value Formula
NPV = Σ [Ct / (1+r)^t] - C₀
Where:
- Ct = Cash flow at time t
- r = Discount rate
- t = Time period
- C₀ = Initial investment
Step-by-Step:
- 1
List all cash flows
Year 0 (investment), Year 1, Year 2, etc.
- 2
Discount each cash flow
Divide each future CF by (1+r)^t.
- 3
Sum and subtract
Add all PVs and subtract initial investment.
Worked Examples:
Project evaluation
Initial: -10LCF Y1-5: 3L/yearr: 10%
Result: NPV = 1.37L
PV of 3L x 5 years at 10% = 11.37L. NPV = 11.37 - 10 = 1.37L (positive = accept)