NPV (Net Present Value, NPV, net present value, net present value, net present value) - this is an indicator of the effectiveness of the investment project, which allows you to evaluate the payments made during the implementation of the investment project, given to date. As a rule, if NPV> 0, then an investment project is considered effective if NPV
NPV calculation formula
The calculation of NPV in the General case is carried out according to the following formula:
NPV calculation formula
where Rk - the value of cash receipts over n years,
IC is the value of the initial investment,
i is the discount rate.
There are options when the implementation of an investment project is not associated with a one-time initial investment, but involves investment over several periods. Then the calculation of NPV is carried out according to the following formula:
The formula for calculating NPV when investing over several periods
NPV calculation example
We give an example of calculating the NPV of a conditional investment project. Suppose that the volume of investment in a new building is 15,000 thousand rubles, the forecast of annual income from the rental of premises is 5,000 thousand rubles. for 5 years. The discount rate is 17%. Calculate NPV.
Calculation of NPV: NPV = 5000 / 1.17 + 5000 / 1.17 2 + 5000 / 1.17 3 + 5000 / 1.17 4 + 5000 / 1.17 5 - 15000 = 15996.73 - 15000 = 996.73 thousand rubles.
Since the calculated value NPV> 0, the project can be accepted for practical implementation.
As mentioned earlier, the investment conditions during the implementation of the project may be different. Consider the example of calculating the net present effect (income) in the case when the investment is carried out at a time, and the annual income from the implementation of the investment project is not equal. Suppose that the volume of investments amounted to 12,500 thousand rubles, the project implementation period is 5 years, the price of invested funds is 12.5% per annum, the annual income from the implementation of the investment project is as follows (in thousand rubles): 2500, 2250, 1980 , 1850, 1720. Let us determine the value of the net reduced effect: NPV = 2500 * 1.125 -1 + 2250 * 1.125 -2 + 1980 * 1.125 -3 + 1850 * 1.125 -4 + 1720 * 1.125 -5 - 12500 = -4999.96. Since the value of the indicator in question is less than 0, the contemplated project under consideration will not be profitable in its implementation and should be rejected.
Let us also consider an example of calculating the discounted net income in the case when the income from invested funds begins to arrive after the completion of the investment project, i.e. cash flow includes not only positive, but also negative values. For example, there is an investment project with the following indicators of payment flows (in thousand rubles): -215, -295, 50, 500, 300, 800, 1000. The price of invested capital is 14% per annum. We calculate the value of the net present effect (income): NPV = (-215) * 1.14 -1 + (-295) * 1.14 -2 + 50 * 1.14 -3 + 500 * 1.14 -4 + 300 * 1.14 -5 + 800 * 1.14 -6 + 1000 * 1.14 -7 = 834.12. The NPV value is positive, therefore, the project can be accepted for practical implementation.
Consider an example of calculating NPV in Excel. The first step in calculating the indicator in question is to prepare the source data in Excel. A wide range of features of the specified table processor allows you to present the source data in a variety of options (including those with different layouts and formatting), one of which is shown in the figure:
Source data for calculating NPV in Excel
Further, to calculate the net reduced effect (income) in the cells C4: C11, it is necessary to enter the formulas by which the NPV will be calculated for each year of the project. You can do this as follows: