What is the pure present value?

The net present value (NPV) concerns the current value of the expected cash flows. It is used to compare various investments, whether they invest internal in society, usually called projects or external investments made by a company or individual. Pure present value is used because it may be difficult to compare investments, especially if there are different investment values ​​or different expected profits due at different times. By using the current value of these estimated investments and expected profits, investments can be compared evenly and decisions made on the basis of the most profitable.

In order to calculate the net current value of the project or investment, the current value must first be discounted. The rate at which the expected profits are discounted is called a discount rate or obstacle. Usually the discount rate is calculated by determining the amount of interest that the investor could earn in the time period & npomlčka; Usually one year - if he invests in safetyLighter investments, such as letting money earn interest on a savings account.

To calculate the NPV, it must first determine what predicted cash flows are expected throughout the life of the investment, which would be treated for an initial investment for a negative cash flow. Furthermore, the discount rate should be determined by determining what the return rate would be if a safer investment was chosen. The discount rate is then used to discount the expected cash flows as follows.

npv = c0 + [CT/(1 + R) t)]

C0 is the initial capital expenditure

CT is a cash flow expected in a given period of time (ie annual)

R is a discount rate (interest in safe investment)

t is a period of time (ie the first year, the second year)

Using a net current value to evaluate the profitability of the project or investmenters, it is usually necessary to realize that this method PIt makes the conditions remain stable throughout the life of the project or investment, a scenario that rarely occurs. The discount rate is also based on the assumption of what a safe investment would be. A number of methods can be used in determining the discount rate, from the use of an interest rate of a 10-year bond to the use of the capital assets (CAP-M) price. Whatever the method is used, the sensitivity analysis at the discount rate should be carried out to see how profitability may vary between projects or investments due to a different scenario.

Pure current value is usually calculated for internal return rate (IRR) of the same project or investment. The internal return rate is calculated by determining the discount rate for which the net present value would be zero. Although there will be multiple solutions for each scenario for the internal return rate, the pure current value does not have to correlate with the inner return rate and the internal return rateODU use of only one value for the entire duration, while the net present value can be calculated using different discount rates for different periods. The calculation of the internal return rate provides a project evaluation or investment profitability for further perspective.