net present value

Question 1

What is Net Present Value
What is Cash Flow?

Answer 1

NPV is the sum of the present value of cash inflows and cash outflow. In other words, it is the difference between the present value of cash inflows and the present value if cash outflows for a given period of time.

Cash flow statement represents the summaries of cash-flowing in and cash-flowing out of an enterprise

Question 2

Significance of Net Present Value

Answer 2

1. NPV is a strong approach to determine if the project is profitable or not. It considers the interest rate/discount rate.
2. Positive NPV indicates that the investor’s financial position will be improved by undertaking projects.
3. Negative NPV will indicate the financial loss of an investor.
4. Null or Zero NPV indicates that the present value of benefits is exactly equal to value of cost.

Question 3

Net Present Value Decision Rule

Answer 3

The following NPV signs explain the investment is good or not good.

NPV>0: The present value of cash inflow is more than the present value of cash outflow. Money earned from the enterprise is more than the total money invested.

NPV = 0: The present value of cash inflow is equal to the present value of cash outflows. The money earned from the enterprise is equal to the total money invested.

NPV< 0: The present value of cash inflows is less than the present value of cash outflow. The money earned from the investment is less than the total money invested for the enterprise.

Question 4

Net Present Value Formula

Answer 4

First find total present value(PV):

                                             PV= (Future Value)/(1+i)n

Where,
i: Interest rate
n: Number of years

2. Then Add total money invested (outflow) to the present value that you receives(inflow for the given period of time.