Of future cash inflow (cash influx) from present worth, the net amount which of cash outflow (cash drain) which is investment deducts present worth. With the index which shows the profit characteristic of investment (circulation of money investment and business investment), it has become the most general standard of investment judgement.
Speaking simply,it isthe net value (amount) which "collection amount - being something which calculated investment" in the base, can obtain DCF with the investment matter. If NPV is large, if large extent economic value is large and NPV is minus, the fact that you cannot obtain profit is shown.
As a merit, because it is shown with the amount, "you can obtain profit?" "the investment amount propriety?" being to be thing and cash flow base which can be judged simply because accounting standard and thing and the capital cost which are not influenced by the tax system are reflected, being able to do the judgement which in the future interweaves risk, you can list the fact that among other things it can compare the investment matter where period and investment time differ from the fact that it converts to the present worth base monistically.
The pre-defined equation of NPV is, as follows.
NPV=
N
S
N=0
FCFn
(1+r)N
FCF= free cash flow
R= discount rate
N= period
NPV is calculated, cash flow (free cash flow), discount rate, three elements of period become necessary. Because the indefinite element that increases, investment period with long-term matter and the like estimate of cash flow and discount rate difficulty, or fluctuation is large, note becomes necessary.
Furthermore, the discount rate where NPV becomes with zerois calledIRR (internal rate of return).
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