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Net Present Value (NPV)

 

Net present value (NPV) is a value calculated by discounting all future net cash flows (net cash flow is calculated taking all the forecasted future income and subtracting from them forecasted expenses in every period separately). The net cash flow of every year is discounted by the discount factor and the obtained result is NPV. The discount rate basically depends on two factors: risk free interest rate and riskiness of the project. 

 

Net present value shows or investment is worth for investing, or better to reject the project. If the NPV is positive, it is a good indication. Mostly NPV is used together with other investment valuation ratios like IRR (internal rate of return).

 






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