Definition of Net Present Value
In the field of finance, a sequence of cash flows, and both incoming and outgoing, the sum of the present values (PVs) of the individual cash flows of the same article is interpreted as the net present value or NPV. In other words, NPV of Net present worth (NPW) is the divergence between the present value of cash inflows and the present value of cash outflows.
when it is seen, that cash flows are only incoming in future like coupons and principal of the bond, and left purchase price as the only outflow of cash, so the Net present value will be simply,
(PV of future – The purchase price)
The usage of NPV is implemented as a central tool in discounted cash flow (DCF) analysis, as a standard to apply time value of time to decide the estimation of long-term projects. NPV is also sued for capital budgeting and throughout economics, finance and accounting.
Books on Net Present Value
Principles of Accounting By Belverd Needles, Marian Powers, Susan Crosson (published by Cengage Learning, 2010)
Wiley CPA Exam Review 2008: Business Environment and Concepts By O. Ray Whittington, Patrick R. Delaney (published by John Wiley & Sons, 2007)
How Net Present Value works?
Here is the practical example of Net present value,
Suppose, there is retail clothing which has intended to buy an existing store, the prior job would be the estimation of future cash flows from the store, then it comes to discounting on those cash flows into one lump-sum present value of, let’s assume it as $565,000. If the possibility came that the owner of that store agrees to sell the business for less than $565,000, then it would be considered as a positive NPV investment. But if the owner does not agree on purchasing for less than $565,000; as a result, the purchaser will not but the store, the investment would be counted as a negative NPV investment, as a consequence, the overall value of the clothing company will reduce.
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