Net Present Value (With Example).pdf

Have a look on Financial NPV

1. FINANCIAL MANAGEMENT

2. PRESENTED BY,
NAVYA JAYAKUMAR P

3. TOPICS
INTRODUCTON
THREE POSSIBILITIES
CALCULATION METHODS
FORMULA
EXAMPLE
ADVANTAGES
DISADVANTAGES
CONCLUSION

4. INTRODUCTON
•Net present value (NPV) is the difference between the present value of
cash inflows and the present value of cash outflows over a period of
time. It may be positive, zero or negative.
•NPV is used in capital budgeting and investment planning to analyze
the profitability of a projected investment or project.
•Also known as sophisticated technique for capital budgeting exercise.
•It accounts for time value of money by using discounted cash flows in
the calculation.

5. THREE POSSIBILITIES
•Positive NPV:
If present value of cash inflows is greater than the present value of the
cash outflows, the net present value is said to be positive and the investment
proposal is considered to be acceptable.
•Zero NPV:
If present value of cash inflow is equal to present value of cash
outflow, the net present value is said to be zero and the investment proposal is
considered to be acceptable.
•Negative NPV:
If present value of cash inflow is less than present value of cash
outflow, the net present value is said to be negative and the investment
proposal is rejected.

6. NPV is Positive.
Project is Acceptable.
NPV is Zero.
Project is Acceptable.
NPV is Negative.
Project is Not Acceptable.

7. CALCULATION METHODS
1.A table is prepared showing the cash inflows
2.Present value of each cash inflow is calculated by using discount
rate
3.The sum of the present values of all cashinflowsgives the total
present value
4.The difference between the total present value of cash inflow and
total cash outflow is arrived at the NET PRESENT VALUE (NPV)

8. FORMULA
In this equation:
Rt= net cash flow (inflow –outflows)
i= discount rate
t= number of time periods
NPV = (Cash inflows from investment) –(cash outflows or costs of
investment)

9. EXAMPLE
Let's assume Company X wants to buy Company A. It takes a careful
look at Company A's projections for the next 10 years. It discounts those
projected cash inflows back to the present using its weighted average
cost of capital (WACC) and then subtracts the cost of purchasing
Company A.

10. Cost to purchase Company A : Rs.10,00,000
Present value (PV) of cash flows from acquiring Company A:
Year 1: Rs.200,000
Year 2: Rs.150,000
Year 3: Rs.100,000
Year 4: Rs.75,000
Year 5: Rs.70,000
Year 6: Rs.55,000
Year 7: Rs.50,000
Year 8: Rs.45,000
Year 9: Rs.30,000
Year 10: Rs.10,000
Total: Rs.7,85,000
Net Present Value (NPV) = Rs.785,000 -Rs.10,00,000 = -Rs.215,000
At this point, management for Company X would use the net present value rule to decide
whether or not to pursue the acquisition of Company A. Because the NPV is negative, they
should say, "No."

11. ADVANTAGES
NPV gives important to the time value of money.
In the calculation of NPV, both after cash flow and before cash flow
over the life span of the project are considered.
Profitabilityand riskof the projects are given high priority.
NPV helps in maximizing the firm's value.

12. DISADVANTAGES
NPV is difficult to use.
NPV cannot give accuratedecision if the amount of investment of
mutually exclusive projects are not equal.
It is difficult to calculate the appropriate discount rate.
NPV may not give correct decision when the projects are of unequal
life.

13. CONCLUSION
Net Present Value (NPV) is the calculation used to find today’s value
of a future stream of payments.
It accounts for the time value of money and can be used to compare
investment alternatives that are similar.
The NPV relies on a discount rate of return that may be derived from
the cost of the capital required to make the investment, and any project
or investment with a negative NPV should be avoided.
An important drawback of using an NPV analysis is that it makes
assumptions about future events that may not be reliable.