# Net present value present value index

A dollar today is worth more than a dollar in the future, because inflation erodes the buying power of the future money, while money available today can be invested and grow. The term constant dollars refers to the net present value relative to a fixed date. The term current dollars refers to the unadjusted value of the money. The term discount rate refers to a percentage used to calculate the NPV, and reflects the time value of money. ## NPV Formula

It's fun, isn't it! Ah, yes, but there are problems.

The index is an efficiency measure for investment decisions under capital rationing. Nearby Terms Present Value Components Analysis Present value factor Present Value Index (PVI) Present value of. Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. PRESENT VALUE TABLE. Present value of \$1, that is where r = interest rate; n = number of periods until payment or receipt. 1 r n Periods Interest rates (r) (n).

Sometimes it gets confusing putting all the numbers in, especially if you have alternate between a lot of negative and positive numbers. IRR assumes that the all cash flows from the project are invested back into the project.

Sometimes, that simply isn't possible. Let's say you have a sailboat that you give rides on, and you charge people money for it. Well you have a large initial expense the cost of the boat but after that, you have almost no expenses, so there is no way to re-invest the money back into the project.

Fortunately for you, there is the MIRR. Modified Internal Rate of Return - MIRR - Is basically the same as the IRR, except it assumes that the revenue cash flows from the project are reinvested back into the company, and are compounded by the company's cost of capital, but are not directly invested back into the project from which they came.

OK, MIRR assumes that the revenue is not invested back into the same project, but is put back into the general "money fund" for the company, where it earns interest. We don't know exactly how much interest it will earn, so we use the company's cost of capital as a good guess.

Why use the Cost of Capital? Because we know the company wouldn't do a project which earned profits below the cost of capital. That would be stupid. The company would lose money. Hopefully the company would do projects which earn much more than the cost of capital, but, to play it safe, we just use the cost of capital instead.

We also use this number because sometimes the cash flows in some years might be negative, and we would need to 'borrow'. That would be done at our cost of capital. The money is going to be invested back into the company, and we assume it will then get at least the company's-cost-of-capital's interest on it.

## BREAKING DOWN 'Net Present Value - NPV'

So we have to figure out the future value not the present value of the sum of all the cash flows. This, by the way is called the Terminal Value.Net present value is the present value of net cash inflows generated by a project including salvage value, if any, less the initial investment on the project.

It is one of the most reliable measures used in capital budgeting. Net present value is a financial technique which uses a projects costs and returns over time to determine if the project will make a positive return..

Importantly it takes into account the time value of money – i.e. that a £ earned today is worth more than a £ earned a year from now. Present Value of an Annuity Due. Present Value of an annuity due is used to determine the present value of a stream of equal payments where the payment occurs at the beginning of each period.

What is 'Present Value - PV' Present value (PV) is the current value of a future sum of money or stream of cash flows given a specified rate of return.

Future cash flows are discounted at the. Net Present Value (NPV) is a way of comparing the value of money now with the value of money in the future. A dollar today is worth more than a dollar in the future, because inflation erodes the buying power of the future money, while money available today can be invested and grow. What is 'Net Present Value - NPV' Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.

NPV is used in.

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