Net Profit Value

1. NET PRESENT VALUE
PROJECT MONITORING
SIR SAIF-UR-REHMAN
BBA 7th SEMISTER

2. Net Present value
• The difference between the present value of
the future cash flows from an investment and
the amount of investment. Present value of
the expected cash flows is computed by
discounting them at the required rate of
return.

3. NPV Basic Formula

4. • A positive net present value means a better
return, and a negative net present value
means a worse return, than the return from
zero net present value. It is one of the two
discounted cash flow techniques (the other is
internal rate of return) used in comparative
appraisal of investment proposals where the
flow of income varies over time.

5. Advantages Of NPV
• It introduces “Time value of Money”
• It expresses all future cash flows in terms of
today's value
• It allows for “Inflation and escalation”
• It looks at all project from start to finish.
• Accurate profit and loss forecast is achieved.

6. • Disadvantages of NPV
The biggest disadvantage to the net present
value method is that it requires some
guesswork about the firm's cost of capital.
Assuming a cost of capital that is too low will
result in making suboptimal investments.
Assuming a cost of capital that is too high will
result in forgoing too many good
investments.

7. • In addition, the NPV method is not useful for
comparing two projects of different size.
Because the NPV method results in an
answer in dollars, the size of the net present
value output is determined mostly by the size
of the input.

8. Example
Pv= fv
(1+i)^n
N=5 years
Fv=100000
i=6%
Pv=?
The same formula as discussed above
PV= 100000
(1+0.6)^5
(100000)/(1+0.6)^5 = PV
9536.7=PV