Many investors had to lose sleep and appetite in trying to determine the most effective way to minimize the investment risks and maximizing of profits.However, you need only increase the economic literacy.The net present value will allow a much more objective look at the financial issues.But what is it?
Cash
Before talking about issues such as the net present value, you must first deal with the associated concepts.Positive income (cash flows) are funds that come into the business (interest received, sales revenues from stocks, bonds, futures, etc.).The negative flow (ie expenses) represents funds that are derived from the company's budget (wages, purchases and taxes).Net present value (absolute net cash flow), in essence, is the difference between positive and negative flows.It is this value corresponds to the most important and most exciting question of any business: "How much money is in hand?"To ensure a dynamic development of business needs the right decisions about the direction of long-term investments.
on Investing
Net present value is directly linked not only with mathematical calculations, but with the attitude to investment.Moreover, the understanding of this issue is not as simple as it seems, and is based primarily on the psychological factor.Before you invest in any project, you need to ask yourself a series of questions beforehand:
- Will the new project profitable, and when?
- Maybe we should invest in another project?
net present value of the investment must be considered in the context of other issues, such as the negative and positive flows from the project and their impact on the initial investment.
Movement assets
financial flow is an ongoing process.The assets of the company are treated as use of funds and assets and liabilities - as sources.The final product, in this case - a collection of assets, labor, raw material costs, which are paid ultimately cash.The net present value considering it is the flow of funds.
What is the NPV?
Many people who are interested in economics, finance, investment and business, met this abbreviation.What does it mean?NPV stands for NET PRESENT VALUE, and translates as "net present value".It is calculated by summing the revenues that the company will generate during operation, and the cost of the project costs.Then, the amount of income deducted from expenses.If the value of payments is positive, then the project is considered as profitable.It can be concluded that the net present value - an indicator of whether the project will generate income or not.All future income and expenses are discounted at an appropriate interest rate.
Features calculate the net present value
Net Present Value - the definition of whether the project cost more than the cost spent on it.This figure is estimated to cost price calculation of cash flows generated by the project.It is necessary to take into account the requirements of investors and the fact that these flows may become objects of trading on stock exchanges.
Discounting
net present value calculation is performed based on discounted cash flows at rates equal to the opportunity cost of investing.That is the expected rate of return on the securities is equal to the same risk, and which bears the project in question.On the stock market development assets are absolutely the same in terms of the risks are assessed so that it develops on them and the same rate of return.The price at which participating in the financing of the project investors expect to get a rate of return on investment is obtained by discounting the flow of funds at the rate equated to opportunity costs.
Net Present Value of the project and its properties
There are several important features of this method of evaluation.Net present value allows to evaluate investments based on the criterion of maximizing the total cost, which is available to investors and shareholders.This criterion is subject to financial and currency operations both in fundraising and capital, as well as their placement.This method focuses on cash income, which is recognized in income in the bank account, thus neglecting akkauntingovymi income, as reflected in the accounting records.You must also remember that the net present value of the cost of alternative uses of funds for investment.Another important feature is the subordination of the principles of additive.This means that there is an opportunity to consider all the projects in the amount and individually, and the sum of all components will be equal to the total cost of the project.
index
present value Net present value is dependent on the current index value (PV).It is defined as the value of income funds in the future, which refers to the date of discounting.The calculation of the net present value is usually includes the calculation of the current value of the index.Find this value can be a simple formula that describes the following financing activities: placement of funds, payment, repayment and bullet repayment:
PV = FV / (1 + r).
where r - is the interest rate, which is the price to pay for the funds borrowed;
PV - is the amount of funds that are intended for placement on the terms of payment, maturity, repayment;
FV - is the amount required to repay the loan, which includes the original amount of the debt, plus interest.
calculation of the net present value
from the current value of the index can go to the calculation of NPV.As mentioned above, the net present value - the difference between the discounted stream of future revenue funds and the sum of the total investment (C).
NPV = FV * 1 / (1 + r) -C
where FV - the sum of all future revenues from the project;
r - the rate of return;
C - the total of all investments.
