The Net Present Value (NPV) for the project is 19,017.50 with a project cost (outflow) $160,000
What is Net Present Value?
- A series of project cost that occur at various times are subject to the net present value (NPV) or net present worth (NPV ). The amount of time between now and a project cost determines the present value of that cash flow.
- The discount rate is another factor. NPV takes time value of money into the account. It offers a way to assess and contrast capital investments or financial products with project cost that are dispersed over time, such as loans, investments, insurance contract payouts, and many more uses.
- For each period of an investment, the expenses (negative cash flows) and benefits (positive project cost) are calculated to arrive at the net present value (NPV). By discounting each period's cash flow's future worth (see Formula) at a recurring rate of return, the present value (PV) of each is then determined (the rate of return dictated by the market). Total discounted future cash flows make up net present value (NPV).
Net Present Value (NPV) is as follows:
The discount rate is 9%
Year Cashflow ($) Discount factor at 9% Present value of cash flows
0 -160,000 1.0000 -160,000.00
1-12 25,000 7.1607 (Note below) 179,017.50
19,017.50
net present value = [1-1/(1+i)ⁿ]/i
Where, i is the discount rate i.e., 9%, and n is the time i.e., 12 years
I.e., = [1-1/(1+0.09)¹²]/0.09
I.e., = [1-1/2.8127]/0.09
I.e., = 7.1607
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