Comments on: Definition of NPV – Net Present Value

By: Scott Sehlhorst

Scott Sehlhorst — Sun, 10 Jan 2010 19:05:01 +0000

Thanks, Dennis!

Correction made. I really appreciate you taking the time to point this out – will definitely help other folks who read this in the future.

By: Dennis

Dennis — Sat, 09 Jan 2010 17:43:29 +0000

It looks like you compare wrong numbers at the end of the articles.
You say:
$10,000 one year from now has a net present value of $9,524
$500 per month for 20 months has a net present value of $9565
But $9,524 is received using the 5% effective interest rate and $9,565 is received using the 5.13% interest rate.
I guess the correct number for the first example has to be $9,512 = $10,000/(1 + 5.13%).
It does not dismiss the point but makes article hard to understand. I re-read the article multiple times before I got that this is a mistake but not my misunderstanding of the whole concept.
Anyway, thank you for article.

By: Lilianne

Lilianne — Sat, 02 May 2009 16:08:48 +0000

Hi Sir,

I am a university student in Malaysia, I have read the above explaination about NPV and i understand very well. However, can you furnish me more on the assumptions of NPV (i.e., assumed that the inflow and outflow are certained every year) and also the limitations of NPV in relation to investment appraisal? The more assumptions and limitations the better. I am in the midst of preparing for final exam 2 days later, hope to get a fast reply from you. Thank you.

By: Scott Sehlhorst

Scott Sehlhorst — Wed, 06 Aug 2008 15:04:43 +0000

Mahesh, thanks for the question, and welcome to Tyner Blain. The DPV is the same as an NPV for a single cash flow. In the bond example, the DPV = NPV. In the series of payments example, you calculate the DPV of each payment, and sum them up to calculate the NPV. Wikipedia provides a good article on IRR, let me know if that doesn't explain it well enough

By: Scott Sehlhorst

Scott Sehlhorst — Wed, 06 Aug 2008 14:56:48 +0000

Bahram, welcome to Tyner Blain. What is it you need help with, specifically?

By: bahram

bahram — Wed, 06 Aug 2008 14:21:49 +0000

hello
i am student in ph.d (watershed management) in malayzia.
my proposal in ph.d is (The evaluation of the implemented watershed management operation from both technical and socio-economical effect point of view).is it possible for you to help me,and send file about socio-economic and N.P.V AND IRR AND BENEFIT COST ANAYSIS.
THANK YOU
BAHRAM GOLRANG

By: mahesh

mahesh — Sun, 24 Feb 2008 14:28:17 +0000

Dear Sir,

Would also like to Know can ou explain DPV( discounted present value) and IRR( internal rate return)with suitable examples as above which are really helpful and easy to understand.

By: RED GREEN REFACTOR IT! » Blog Archive » “Scegli la più semplice”…dimostriamo se e quando incrementa il ROI.

Thu, 08 Mar 2007 08:50:25 +0000

[...] Passiamo quindi ad analizzare i costi delle 4 soluzioni possibili, confrontandole in termini di flusso di cassa e soprattutto in termini di Present Value, assumendo un tasso dello 0,8%. Il campo NET delle tabelle, indica la somma dei Present Value sui 16 periodi (Net Present Value). [...]

By: Scott Sehlhorst

Scott Sehlhorst — Fri, 14 Apr 2006 13:54:50 +0000

Hi Ashley, thanks for reading and thanks for the comment/question!

I believe that there are two answers – one for companies, and one for individuals.

For individuals, I believe a conservative discount rate to use is one that can be achieved with relatively low risk investments (but not risk-free investments). Personally, I use 10%, as an approximation of the long term rate of return for investing in the stock market. This is my approximation for ‘cost of capital’. The efficient market theory implies that to maximize profits in the long run, the discount rate (or hurdle rate) should equal the cost of capital.

For companies, the interesting question is “Would this be dillutive or accretive to earnings?” In other words, what are all of my other projects returning – would this project have a higher or lower rate of return than that?

Unfortunately this is a bit of a circular reference, since all of those other projects need a discount rate for their calculations.

Choosing discount rates higher than the cost of capital tends to favor short term investments over long term investments (earlier cash flow is ‘overwieghted’).

Most companies (I believe) use the CAPM model (Capital asset pricing model) to determine the ideal internal hurdle rate for investment. Applying the CAPM model is such a complex effort, that it would be unreasonable for individual projects to do it. Having a single rate for the company simplifies this quite a bit, as long as the projects being considered have consistent “risk profiles” as other investments the company is making.

The corporations I’ve worked for have used numbers close to 20% as the hurdle rate (as communicated to project teams).

Sorry that doesn’t give a crisp answer, but there just isn’t a simple answer.

By: Ashley

Ashley — Fri, 14 Apr 2006 13:11:57 +0000

How do you choose the discount rate for the projects you are comparing? This is always the puzzling part of NPV analysis.

By: Scott Sehlhorst

Scott Sehlhorst — Sat, 18 Mar 2006 02:20:35 +0000

Great point Ski – I intend to write a definition of “payback period” soon. Another tie-breaker or decision-driver for investment decisions.

Thanks for the comment and links

By: ski

ski — Mon, 13 Mar 2006 06:14:34 +0000

i and others (very few, but some) look at this
example differently. most of my life, and most
of my projects, are constrained by cash. or
working capital. so i must pick between various
projects, based not on NPV, but getting my money
back the quickest. the concept of flush:

http://consultski.blogspot.com/2006/01/financial-flush-method-ffm.html

http://consultski.blogspot.com/2006/01/financial-flush-method-ffm-part-2.html

it is my hope to expand this example into a more
realistic scenario for part three in my series…

-ski