Well, let us understand with the help of an example: Mr. A Invests Rs.1000 in the project initially. The life of the project is 1 year. He is expecting future cash flows of Rs.1070 year from this investment. Therefore he is making profit of Rs.70/(Rs.1070Rs.1000) from this investment (return of 7% a year) Is he actually making a profit or are we missing something? Let us go one step ahead:
The formula is: \(NPV = [\frac{CF_1}{(1+i)^1} + \frac{CF_2}{(1+i)^2} + ........ + \frac{CF_n}{(1+i)^n}]  Initial\ Investment\) Where,
The assumed discount rate is 10% The above table can also be represented as: \(NPV = \frac{10,000}{(1+0.1)^1} + \frac{20,000}{(1+0.1)^2} + \frac{35,000}{(1+0.1)3} + \frac{45,000}{(1+0.1)^4} + \frac{30,000}{(1+0.1)^5} + \frac{25,000}{(1+0.1)6} + \frac{5,000}{(1+0.1)^7}\)  1,00,000 \(NPV = \frac{10,000}{1.1} + \frac{20,000}{1.21} + \frac{35,000}{1.331} + \frac{45,000}{1.464} + \frac{30,000}{1.611} + \frac{25,000}{1.772} + \frac{5,000}{1.949}\)  1,00,000 Net Present Value = (9,091 + 16,259 + 26,296 + 30,736 + 18,628 + 14,112 + 2,566)  1,00,000 = Rs. 17,957
Conclusion
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2 Comments
Jose Tinajero
31/1/2017 02:45:00 am
I wish to get in contact with you
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31/1/2017 09:11:58 am
Thank you for reading the article and posting the comment in it.
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