What does NPV mean? How is it calculated?

The economic meaning of net present value is an investment project, the difference between the present value of future net cash flows and the present value of the original investment is called the net present value. The formula for calculating the net present value: net present value (NPV) = the present value of future net cash flows - the present value of the original investment. NPV is negative, that is, the investment project that the rate of return is less than the predetermined discount rate, the program is not feasible. But does not indicate that the program must be a loss-making project or the rate of return on investment is less than 0.

NPV is in the life of the fixed assets, the net present value of cash inflows and outflows according to the desired rate of return or cost of capital discounted difference, that is, a net present value of investment in the present value of the total present value of future revenues over the amount of the present value of the original investment and the present value of the other inputs. Any investment in fixed assets, if the net present value of the present value of cash flows is greater than or equal to the present value of cash outflows, that is, the net present value is positive or zero, the net present value of the project is feasible; otherwise it is not feasible. This net present value asset investment evaluation method is the net present value method.

The advantages and disadvantages of the net annual value:

Advantages: strong applicability, can basically meet the project life of the same mutually exclusive investment program decision-making;

Can be flexible to consider the risk of investment (the discount rate contains the risk of investment compensation rate requirements).

Disadvantages: the discount rate is not easy to determine;

Absolute number of indicators, does not apply to independent investment program comparison decision;

Can not be different life span of mutually exclusive investment program for direct decision-making.

Net Annual Value (Net Annual Value) refers to a given discount rate, through the equivalent conversion of the program calculation period of the net cash flow at different points in time to the calculation of the equivalent annual value of each year of the period.

NPV forecasts the net cash flows for each year: net cash flows per year = cash inflows per year - cash outflows per year = revenues from the use of the fixed asset per year - the amount of additional operating costs per year from the use of the changed fixed asset. Discount the annual net present value of cash flows to present value using the appropriate rate of return or cost of capital. Calculate the NPV:NPV = present value of net cash flows for each year. When the net present value >0, indicating that the net present value investment project can obtain more than the minimum rate of return predetermined by the economic income.