The concept of Net Present Value, also known as NPV, refers to an investment criterion that involves updating the receipts and payments of a project to know if that investment is profitable or not. Other terms with which it is known are the Net Present Value (NPV) or Net Present Value (NPV).
A good definition of Net Present Value can be a measure of profitability of a business in absolute net terms, which is the number of monetary units. It is used to assess the different investment alternatives. With the calculation of the NPV of different investments we will know in which of them there will be greater profit options.
The Net Present Value will allow us to face a couple of decisions. On the one hand, to know if the investments to be made are worthwhile for obtaining benefits and on the other to check which investment is the most advantageous. For this, the following parameters must be taken into account.
- NPV greater than 0: the investment project allows obtaining profits and benefits.
- NPV less than 0: the investment must be rejected as it causes losses.
- NPV equal to 0: the investment project does not generate losses or profits, so its execution causes indifference.
Advantages and disadvantages of the Net Present Value
When analyzing investment projects, the Net Present Value presents a series of advantages, mainly because it is very easy to make the calculation and at the same time provides predictions about the consequences of the business projects on the value of the . Another advantage is that it takes into account the different maturities of the net cash flows.
On the other hand, among the disadvantages of the Net Present Value are the complications of specifying a discount rate in the hypothesis of reinvestment of net cash flows.
How to calculate NPV
If we want to obtain this value, we must apply the formula for to calculate the NPV.
- Vtrepresents the cash flows in each period t.
- Iois the value of the initial investment outlay.
- n is the number of periods considered.
If you think it is difficult to calculate the Net Present Value you can use the NPV calculator where you can get this value quickly.