This net present value example explains how net present value is calculated by showing a real life example of how NPV is calculated. Brought to you by IQ Wealth Calcualtors. https://iqcalculators.com/calculator/npv-irr/

1. A Net Present
Value Example
How Is Net Present Value Calculated?
Scenario: A business is thinking of buying a piece of equipment
for $100,000 dollars. After purchasing the equipment, they
believe it will increase cash flow by the net amounts shown
below.
In order to conduct the NPV Analysis, they used a discount rate of
5% because that was their calculated weighted average cost of
capital.
Initial Cash
Flow
The initial capital investment
cost $100,000
PV = $9,523.81
PV = $13,605.44
-$100,000
$10,000
$15,000Year 2
PV = $17,276.75
PV = $20,567.56
PV = $23,505.78
20,000
25,000
30,000
Year 1
Year 3
Year 4
Year 5
60,000
Year 6 Sale of
Investment
PV = $44,772.92
PV = $10,000 / (1 + .05) ^ 1
PV = $15,000 / (1 + .05) ^ 2
PV = $20,000 / (1 + .05) ^ 3
PV = $25,000 / (1 + .05) ^ 4
PV = $30,000 / (1 + .05) ^ 5
PV = $60,000 / (1 + .05) ^ 6
Present Value Formula
Present Value = Cash Flow / (1 + Discount Rate) ^ No. of Periods
Net Present Value Result
Sum of Each Year's Present Value = $129,252.27
Because the net present value is positive, this means that the
investment ROI clears the hurdle rate or discount rate.
If this company has access to $100,000, they should embark on
this project. If capital is limited, they can use net present value to
calculate a competing project's NPV and determine the winner
between mutually exclusive capital projects.
FINAL WORD
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