NPV Formula

NPV Formula

Net present value shortly known is NPV is calculated by deducting present value of cost from the present value of benefit. It is important to remember that benefits are cash inflows , where cost are cash outflows. The NPV formula can be mathematically expressed as under

NPV = PV Inflows- PV of Outflow

Example

Project cost = 50,000

Project income = 30,000

Calculate NPV?

Solution

PV of Cost = 50,000 x (1+12%) ⁰

= 50,000 x 1

= 50,000

PV of Benefit

  Years                                     1                               2               Total

Cash Flows                                   30,000                      30,000

Discount                                      (1+12%)^-1                          (1+12%)^-2

PV                                                  26,786                      23,916           50,702

NPV = 50,702-50,000

= 702