Section 4
Net Present Value
Book
Version 3
By Boundless
By Boundless
Boundless Finance
Finance
by Boundless
6 concepts
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Defining NPV
Net Present Value (NPV) is the sum of the present values of the cash inflows and outflows.
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Calculating the NPV
The NPV is found by summing the present values of each individual cash flow.
Interpreting the NPV
A positive NPV means the investment makes sense financially, while the opposite is true for a negative NPV.
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Advantages of the NPV method
NPV is easy to use, easily comparable, and customizable.
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Disadvantages of the NPV method
NPV is hard to estimate accurately, does not fully account for opportunity cost, and does not give a complete picture of an investment's gain or loss.
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NPV Profiles
The NPV Profile graphs the relationship between NPV and discount rates.