Net present value: Difference between revisions
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The '''present value''' of an investment is the sum of its discounted annual cash flows. The concept can be used to value an asset | The '''present value''' of an investment is the sum of its discounted annual cash flows. The concept can be used to value an asset using the definitional statement that present value of its future cash flows is the amount worth paying for it. Alternatively, it can be expressed as a criterion for an investment project by requiring that the '''net present value''' (NPV) of its future cash flows, allowing for outflows during of its launch phase, should be positive. The corresponding '''net present expected value''' (NPEV) is the sum of the net present values of alternative outcomes after weighting each by its probability of occurrence. The formulae used to calculate NPV and NPEV are set out on the tutorials subpage. | ||
Calculations of NPV or NPEV are used for investment decisions by individuals and by companies and for [[cost-benefit analysis]] of proposals involving public goods. (It is generally preferred to the alternative [[discounted cash flow]] criterion). The [[discount rate]]s appropriate to those applications are discussed in the article on that subject. The subject of risk-limitation in investment decisions is discussed in the article on [[financial economics]] | Calculations of NPV or NPEV are used for investment decisions by individuals and by companies and for [[cost-benefit analysis]] of proposals involving public goods. (It is generally preferred to the alternative [[discounted cash flow]] criterion). The [[discount rate]]s appropriate to those applications are discussed in the article on that subject. The subject of risk-limitation in investment decisions is discussed in the article on [[financial economics]] | ||
Revision as of 02:43, 26 February 2008
The present value of an investment is the sum of its discounted annual cash flows. The concept can be used to value an asset using the definitional statement that present value of its future cash flows is the amount worth paying for it. Alternatively, it can be expressed as a criterion for an investment project by requiring that the net present value (NPV) of its future cash flows, allowing for outflows during of its launch phase, should be positive. The corresponding net present expected value (NPEV) is the sum of the net present values of alternative outcomes after weighting each by its probability of occurrence. The formulae used to calculate NPV and NPEV are set out on the tutorials subpage.
Calculations of NPV or NPEV are used for investment decisions by individuals and by companies and for cost-benefit analysis of proposals involving public goods. (It is generally preferred to the alternative discounted cash flow criterion). The discount rates appropriate to those applications are discussed in the article on that subject. The subject of risk-limitation in investment decisions is discussed in the article on financial economics