Monday, June 21, 2010

It gets bandied about by Telstra and the mining lobby but what is it - > NPV

NPV has been bandied about in Australia quite a lot lately. It's been raised by both sides in the Resources Super Profit Tax debate and today by Telstra when putting a value on the sale of the copper and hybrid coax network to the NBN. In both instances the term has been misued to some degree, either by providing misleading information (the mining lobby) or insufficent detail (Telstra). So, just what is NPV?

Net present value - Wikipedia, the free encyclopedia
In finance, the net present value (NPV) or net present worth (NPW)[1] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows. In the case when all future cash flows are incoming (such as coupons and principal of a bond) and the only outflow of cash is the purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is a central tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise long-term projects. Used for capital budgeting, and widely throughout economics, finance, and accounting, it measures the excess or shortfall of cash flows, in present value terms, once financing charges are met.

The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputting a price; the converse process in DCF analysis, taking as input a sequence of cash flows and a price and inferring as output a discount rate (the discount rate which would yield the given price as NPV) is called the yield, and is more widely used in bond trading.

Net Present Value (NPV)
What Does Net Present Value - NPV Mean?
The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.
How to calculate net present value (NPV) |
Before I show you how to calculate the net present value or NPV, let me briefly explain what it is. Simply put, it's a way to decide whether or not to invest in a project by looking at the projected cash inflows and outflows.

No comments: