The NPV (net present value) of an investment is calculated by adding together the present value of each of the individual cash flows associated with the investment. The purpose of this tutorial is to discuss the effect of taxation and depreciation on each of the investment cash flows and, as a result, on the NPV of the investment itself.
The Excel NPV function is used to calculate the present value of unequal cash flows in time value of money calculations.
To calculate the net present value of a project, the original investment at the start of the project needs to be deducted from the answer provided by the Excel NPV function.
The profitability index (PI) of a series of cash flows is found by calculating the present value of all the cash flows from a project (PV) and dividing the value by the initial investment (I). The profitability index is sometimes referred to as the value investment ratio.
The net present value (NPV) of a series of cash flows is found by calculating the present value of each cash flow at the appropriate discount rate and then adding them together.
The net present value is used to compare projects and to evaluate whether or not a project is worthwhile. It assumes that a project comprises a series of cash flows in or out of the business over a number of years.