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Net present value is used in capital budgeting and investment planning so that the profitability of a project or investment can be analyzed. This is important because it factors in the time value of money and the associated interest and opportunity costs.

Savvy investors and company management will use some form of present value or discounted cash flow calculation like NPV when making important investment decisions.

Click here to download the NPV template

For more analysis on net present value, how it compares to other investment appraisal methods, and details on how the NPV formula is derived, please read our article on net present value.

You can also use our free NPV calculator to calculate the net present value of up to 10 cash flows.

FAQs

1. What is Net Present Value?

Net Present Value is the current value of a future stream of cash flows discounted back to the present. It is used in capital budgeting and investment planning to determine whether a project or investment is worth pursuing.

2. What is the Net Present Value formula?

The NPV formula is: NPV = CF1 / (1 + r)^1 + CF2 / (1 + r)^2 + CF3 / (1 + r)^3 ... + CFn / (1 + r)^n

Where: CFt = the cash flow in period t, r = the discount rate

3. How do you calculate Net Present Value in Excel?

You can use our free NPV calculator to calculate the Net Present Value of up to 10 cash flows. Alternatively, you can use the Excel formula =NPV(rate, values) where rate is the discount rate and values is a range of cash flow values.

4. Is a higher Net Present Value better?

No, higher Net Present Value is not always better. It depends on the discount rate used and whether the cash flows are positive or negative.

5. What does Net Present Value show us?

Net Present Value shows us the current value of a future stream of cash flows discounted back to the present. It can be used in capital budgeting and investment planning to determine whether a project or investment is worth pursuing.

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