Net Present Value

The net present value is the most commonly used method to decide whether to invest in a project or not.

The net present value of a project is equal to the sum of the present value of all after-tax cash flows from the project minus the initial investment.

The investment decision using the NPV method will be based on whether the NPV is positive or negative. The NPV will be positive if the present value of all future cash flows is higher than the initial investment. A positive NPV indicates that the p­roject is worth investing in. On the other hand, a negative NPV indicates that investing in the project will not be wise.

The formula for calculating NPV is:

Example

A project requires an initial investment of $100 million and after that provides the following cash flows in the next four years.

Year 1: $30 million

Year 2: $30 million

Year 3: $30 million

Year 4: $50 million

Assuming a required rate of return of 10%, the NPV of this project will be calculated as follows:

Since the project has positive NPV, the project is considered worth investing in.

Calculator Usage
We can solve the NPV problems using the official BA II Plus calculator as follows:
Step 1: Enter Cash Flows
Before you enter the new cash flows, clear the previous work by pressing the keys CF, 2ND, CLR WORK.
Now you are ready to enter the cash flows. You should see CF0 on screen. Enter the cash flows as follows:
Initial investment         100[+/-][ENTER]         CF0 = -100
Period 1 Cash Flow    [↓][30]                          CF1 = 30
Period 2 Cash Flow    [↓][↓] [30]                     CF2 = 30
Period 3 Cash Flow    [↓][↓] [30]                  CF3 = 30
Period 4 Cash Flow    [↓][↓] [30]                  CF4 = 50
Step 2: Enter Interest Rate
Enter interest rate      [NPV]10[ENTER]         I = 10%
Step 3: Compute NPV
Compute NPV                        [↓] [CPT]            NPV = 8.756
Membership
Learn the skills required to excel in data science and data analytics covering R, Python, machine learning, and AI.
I WANT TO JOIN
JOIN 30,000 DATA PROFESSIONALS

Free Guides - Getting Started with R and Python

Enter your name and email address below and we will email you the guides for R programming and Python.

Saylient AI Logo

Take the Next Step in Your Data Career

Join our membership for lifetime unlimited access to all our data analytics and data science learning content and resources.