Positive NPV Formula

Positive NPV Formula

NPV is positive, when present value of benefit is greater than present value of costs. It means that if all thing happening today, benefits are greater, and therefore project is to be selected. It is important that NPV does not take into account relevant risk associated with project.

Positive NPV = PV of Benefits > PV of Cost

Example

Initial investment for a proposed = 300,000

First Year income from project =     180,000

Second Year Income from Project= 180,000

Cost of capital= 12%

Solution

                                Year 0            Years 1         Year 2

Initial investment            300,000

Income First Year                                           180,000

Income  2^nd Year                                                                        180,000

Discount Factor                (1+.12)^-0                       (1+.12)^-1                    (1+.12)^-2

PV                                      (300,000)              160,714             143,495

NPV = 160,714+143,495-300,000

=4,209