The Book Finance : Applications And Theory Essay
Net Present Value Net present value is calculated by subtracting the present value of all expected expenditures for the project up front and adding the present value of all expected or projected revenue. If the total sum is positive, then the project should theoretically be approved on the basis that inflows of cash will be greater than outflows of cash. The actual equation is shown below:
NPV = [CF0 / (1+i)0] + [CF1 / (1+i)1] + …+ [CFN / (1+i)N]
CF = cash outflows at the beginning of the project
N = the given number of the cash flow and i = the rate at which the cash outflows will accumulate interest or the discount rate
In terms of a project valuation tool, NPV is a very straightforward approach and offers sound logic to determine the profitability of a proposed project. But what about valuing an entire business the same way? NPV can be used to determine if a company is a worthwhile investment for potential buyers or investors. In a business acquisition scenario, NPV is called discounted cash flow model (Gallo, 2014).
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