in modern economic terminology is often possible to meet a term such as "net present value" means a design value that is used when comparing different options of investment.
One of the most important and popular decisions made by business entities, is the question of investments in other companies.For example, each year millions of rubles invested in their plants or equipment that will operate and generate additional revenue for decades.Cash flow in the future, which is able to bring investments are often characterized by some uncertainty.And if plants or factories are already built, and do not bring the expected profit, the investor will not be able to disassemble and re-sell them to compensate for the investment.In this case, a business entity (investor) carries irrecoverable losses.
Terminology
Net present value characterizes the current amount of financial resources required for future income equivalent to its analogue derived from the implementation of a specific investment project.For example, there is a deposit rate of 10%, while $ 100 will bring 110 rubles at the end of the year.From the standpoint of cost-effectiveness analysis of the contribution of $ 100 for a deposit or an investment project that can bring the same 110 rubles, the present value will be the same.
There is an index of profitability of the investment project - is the result of dividing the net present value to the total discounted value of investments (investment costs).
Determine whether investments
When making an investment project for more than one year, the benefits of these investments can be determined by bringing the future of funds received late in the year to the date of commencement of the project.So determined by the net present value, which is to "return" to the investor.This amount is compared with the projected costs, but such an assessment should take into account "pitfall" in the form of interest capitalization.That is a one-time dividends are paid to the investor at the end of the year, but the Bank may pay interest on a monthly basis.That's why when the net present value is determined by a comparative analysis of various formulas, and in the case of a financial institution should be considered deposit monthly capitalization of interest.
In the economic literature can be found such "academic" formulation: the net present value of the investment project - a surplus of financial resources obtained by all cash receipts and expenditures.Its value is given to the start time point (the date of the start of the investment project).
The result displays the size of the amount of money that an investor can get after the project.Often, the current value displays the total profit of the investor, but in this case should not be taken into account the residual value of the project.
Net Present Value of the project: the formula for calculating
So the calculation of this indicator are used such formulas:
- NPV = SUM (CFt / (1 + i) t);
- NPV = -IC + SUM (CFt / (1 + i) t),
where:
t - the number of years;
CF - payment via t-years;
IC - invested capital;
i - discount rate.
discount factors
net present value can be reliably measured only if the correct discount rate is chosen.Based on the values of this parameter, you can find the corresponding coefficients for the period on which the analysis.
Only by determining the value of income and expenditure cash flow net present value can be defined as the difference between these two values.As a result, this indicator can be both positive and negative.
dwell on its significance:
- positive value shows that in the billing period at the discount cash flow terms will exceed the same amount of investment, and this increases the value of a business entity;
- negative value indicates the absence of the desired rate of return, which leads to a certain loss.
Consideration of alternatives investments
Often investors before investing their own funds in this or that project are asking themselves: what discount rate should be used when calculating the enterprise net present value?The answer depends on the availability of alternatives to investment funds.For example, sometimes instead of a variant of investments, the company is using its financial resources to purchase other types of capital that can bring big profits.Or business entity acquiring the bonds, which tend to guaranteed availability of their own profitability.
investments with equal levels of risk
There is such a thing as "similar" investment.This investment, which have the same level of risk.The theory is known that the higher the risk in the investment, the higher the income level, and accordingly, the net present value.Therefore, an alternative investment in the project - the income on which it is probable that in the same size with an investment in a project or asset with the same level of risk.
To assess the risk of investment is necessary to assume the existence of the project, not associated with any risk of any.Then, as the opportunity cost of investments are risk-free income.An example of such income is the purchase of government bonds.In the calculation of the project ten years of business entity can use the annual interest rate on the relevant government bonds.
Summing up the material, it should be noted that this economic indicator is quite successful in helping the investor in determining whether to invest surplus funds in a particular industry.
