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Total Value NPV

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The concept of present value is based on the concept of time value. Since money has time value, a rupee today is more valuable than a rupee after one year. In any investment or in any project, the net present value or NPV is one of the most important factors. You always need projects that give positive NPV as otherwise the project or investment is not viable in the first place.

In this segment we look at the net present value calculator or the NPV calculator online. The net present value calculator or the NPV calculator is a kind of software that enables you to estimate the net present value of the project or investment based on a hurdle rate or IRR as it is popularly known as. Here we look at the NPV calculator formula as well as the NPV calculator with steps in detail.

Before we understand NPV calculator or net present value calculator, let us first understand what is this
concept of NPV? To put in simple terms, the NPV or the Net Present Value is a simple tool that estimates
the difference between the present value of future cash flows and the amount of the current investment.
Let me explain. If you invest Rs.10 lakh, then the present value of the future returns should be more than
the current investment. Only then it has positive NPV. That is evidenced by the NPV calculator.

The present value of your expected future cash flow is derived by discounting these cash flows at a
specific hurdle rate of return, which is normally the cost of capital. NPV is most popular when you
evaluate mega infrastructure projects, mergers and acquisitions and all types of investments. When you put
the NPV as zero and calculate the implied yield of the cash flows, that figure is called the internal rate
of return or IRR

From the concept of the net present value or NPV we derive the idea of the NPV calculator or the net
present value calculator. The NPV calculator or the net present value calculator is a method of estimating
the NPV of a project based on future cash flows, initial investment and the hurdle rate. Once you feed in
this basic information, you get the NPV in a jiffy. Why is the NPV calculator so important. That is
because NPV lies at the core of any project analysis and therefore an in-depth understanding of this
concept helps you to make sound investment decisions. You can mathematically look at is as under.

It is a comprehensive evaluation technique as it takes into account the effect of time on the cash flows and also the cost of capital or the hurdle rate.

The NPV calculator helps you to calculate the NPV of a project or investment in quick time. But it is important to understand how the process flow of this NPV works. Let us put down some key points.

- The net present value calculator or NPV calculator is a simulation which shows you the value of an investment at present.
- The NPV calculator takes into account the expenses, revenues and capital costs to determine the worth of an investment or a project.
- The first step is to project your cash flows, which is always on a net basis. Your cash flow is your revenue flows, less revenue expenses, less provision for capital depreciation.
- The next step is to identify the hurdle rate or the cost of capital. If you investment is funded by debt and equity, then you must take the weighted average cost of debt and equity as the discount rate for calculating the NPV.
- The other way is to use the cash flows to calculate the IRR of the project. Then compare the IRR of the project or the investment with other similar projects and see if the returns are higher and hence is the project is justified.

The NPV calculator helps you to decide if an investment or a project is worth it or not. The net present value is a pure financial metrics and you need to apply other non-financial parameters also before taking a final decision on the project. That is the gist of the NPV calculator.

- In the event of Positive NPV, the present value of cash inflows is greater than the present value of cash outflows. This is an ideal investment
- In the case of Negative NPV present value of cash inflows is less than present value of cash outflows. Such projects are hard to accept and to even justify internally
- In a situation of zero NPV, the outcome is ambiguous. Normally, most project managers insist on margin of safety, i.e., substantial positive NPV to okay a project.

Here are some of the popular uses of NPV as calculated by the NPV Calculator.

- The NPV Calculator tells you quickly whether the project or investment is worth it or not at the current cash flows.
- The NPV Calculator is a quick summation of the time value adjusted returns of the investment or a project.
- The NPV Calculator very eloquently tells you as to how much is the money in the future, worth today.
- Very importantly, the NPV Calculator helps you measure the opportunity cost of an investment. You can plan the investments to earn inflation-beating returns.
- If you know the future value of your investments, you can make better and more optimal investment decisions. That is where the NPV Calculator comes in handy.

The formula of net present value or NPV can be summarized as under.

**NPV = [Cn/(1+r)^n], where n={0-N}**

In the above formula, let us look at the components.

Cn = Difference of cash flows

r = Discount rate or hurdle rate

n = Time in years

The final decision point is based on whether the NPV is positive or negative.

On paper, the project or investment with higher NPV is always better. Remember, there is also a risk aspect to it. Apart from the present value of future cash flows, you must also look at the probability and predictability of the future cash flows. More consistent, the better.

The discount rate which equates the NPV of a project or investment to zero is the internal rate of return or the IRR. This is also called the hurdle rate and one popular way of weighing investments is to also compare with benchmark IRR..

There is nothing like the ideal NPV. The condition is that NPV should be positive for the project to be justified and justifiable.

You need to estimate the discount rate or hurdle rate based on your cost of capital used to fund the project. For example, if you are funding the investment with a mid of equity and debt, then the weighted average cost of equity and debt will be your discount rate or hurdle rate.