Leaderboard

Before Analyzing The NPV calculator, let us first understand what NPV is all about: NPV stands for Net Present Value which is one of Discounted Cash Flow Techniques which were developed to take account the time value of money and to improve the accuracy of cash project evaluations. in simple words we can say that NPV is the difference of present value of cash ouflow and future value of cash inflow over a period of time. NPV consists of: finding the present value (PV) of each cash flow, discounted at an appropriate percentage rate. finding the NPV by adding the discounted net cash flow to determine whether the project is acceptable or not. If two or more projects having positive NPV then the one which is of higher NPV is a more likely choice. NPV can be positive, negative or zero. Projects with Positive NPV have more return or cash flow or in other words we can say that projects with positive NPV are profitable to the organization but projects with negative or zero NPV is loss to the organizations but it does not mean that we can not go with projects with negative or zero NPV. This will be explained further. Lets understand the calculator with the given values in the question: Future Cash Flow: Amount given is 50000 which is an estimated value when the investment done for the project. Cash flow is the amount which is the increase or decrease in the amount of money for any business. or in other words its the company's ability to create value for shareholders which is determined by its ability to generate positive cash flow. For any organization its very important to have good Cash Flow, Profit and Return of Investment(ROI). Any organization can survive with less profit and ROI but it cant go with poor cash flow or if there is no cash flow then it may close down the business in future. Rate of interest of discount rate: it is the expected rate of interest to compute the present value which is 8 % in above example. discount rate is company specific because its related to how the company gets its funds. It is the rate of return that the company expect. Time Period: this is the time period after which the cash flow is expected. In above example this is of 2 years. Initial Investment: This is the amount which is invested initially that is expected to generate future cash flow. in above example this is 42867. in above example when we put all values in calculator we see that NPV comes zero. but it does not means that zero NPV indicate no value zero NPV means that investment earns a rate of return equal to discount rate. Because NPV is the measure of wealth creation relative to the discount rate. In above example we should go with this project as this project gives a huge increase in employee satisfaction scores and corporate responsibility visibility for this company. in above example we have good cash flow which is very good for the organization but has zero NPV. Sometimes we select projects even negative NPV for example when we are going to buy a new car then we know that after so many years residual value will be less when we sell it. but still we buy because things like bus or any cab fairs that we are not going to pay now after buying a car and now we can drive anywhere ,we can go anywhere , there will no need to wait over stations or bus stands so time also saving, so we buy new car when we consider all factors although we know that residual value of car is less. Another example is that Facebook bought what's app and Instagram yet both are not still profitable because they know if they don't then Google might buy both and get more users on What's App and Instagram. So Facebook has to pay to avoid the user churn. Another example is of safety equipment used in industries, they all have almost negative NPV but still are used because they are important to ensure people are not getting injured or killed. Similarly we can select project with Zero NPV because: Zero NPV increase revenues despite not increasing profits. because shareholders look to revenue growth as an indicator of financial growth. It may involve social benefits that will increase brand value of the organization. it may be a part of legal or regulatory requirements. it may change in the economic cycle which will lead to project to a positive one. As stated in the example it may give a huge increase in employee satisfaction scores and corporate responsibility visibility for this company.