The net present value (NPV) is the sum of the discounted annual cash flows. It provides an evaluation of what the expected net benefit from the initiative would be if it were available at the time the decision was taken.
Its formula is:
B = benefits
C = costs
t = time
r = discount rate
Two conditions have to be satisfied in order to decide to realize the project: (a) the NPV, at the predetermined discount rate, must not be negative for any of the stakeholders involved; (b) the estimated NPV has to be superior or equal to the NPV of alternative projects.
The most important features of the NPV are:
- it considers cash flows produced during the whole economic life of the investment;
- it gives different weights to the cash flows related to different time periods;
- its value depends on the importance of the investment value;
- under the same conditions, its value could vary depending on the scale of the project dimensions;
- it is affected by the subjective value of the discount rate.
Editor: Carmen NOTARO
© 2010 ASSONEBB