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What is NPV?

Author:
Harold Averkamp, CPA, MBA

Definition of NPV

NPV is the acronym for net present value, which can be calculated as follows:

  • The present value of the future cash inflows
  • Minus the cash investment

Example of NPV

Assume that a company makes a cash investment of $500,000 in a project that is expected to provide future cash inflows of $100,000 at the end of each year for 10 years.

The future cash receipts of $100,000 at the end of each year for 10 years needs to be discounted to their present value. If the future cash amounts are discounted by 14% per year compounded annually (the company’s required return), it will result in a present value of approximately $522,000.

The $522,000 of present value coming in minus the $500,000 of present value going out results is a positive net present value of $22,000. In other words, the company will earn slightly more than 14% per year on its $500,000 investment.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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