The following is an extract from Wikipedia, worth a read.
"Formula Each cash inflow/outflow is discounted back to its present value (PV). Then they are summed. Therefore NPV is the sum of all terms , where
t - the time of the cash flow i - the discount rate (the rate of return that could be earned on an investment in the financial markets with similar risk.) Rt - the net cash flow (the amount of cash, inflow minus outflow) at time t (for educational purposes, R0 is commonly placed to the left of the sum to emphasize its role as (minus the) investment. previous formula helps to determine the present value of cash flow (Out/In) at a specific time e.g. one cash inflow after three year but if the cash flows are continuous and of same amount e.g. $100 at the end of each year from year one to ten then the following formula will be used[2]
1 - (1+i)-n ------------- i
The result of this formula if multiplied with the Annual Net cash in-flows and reduced by Initial Cash outlay will be the present value but in case where the cash flows are not equal in amount then the previous formula will be used to determine the present value of each cash flow separately. Any cash flow within 12 months will not be discounted for NPV purpose.[3]"
While very technical and sometimes indicative NPV is, as many have said, based on many future assumptions.
The discussion makes good soup though,
Cheers Firthy
NKP Price at posting:
45.0¢ Sentiment: LT Buy Disclosure: Held
