Question

What is net present value?

How does net preset value work?

Answer 1

Net PresentValue:-

Net present value is the investment evaluation technique , where we evaluate that whether the investment gives required rate of return or not. It helps to decide whether to invest or not in any project.

How does NPV work:-

The formula to calculate NPV = (PV of cash inflows discounted at the required rate of return) -PV of cash outflows.

If the NPV is positive, then the available rate of return on that project or investment is more than required rate of return , and project is to be acceped. However if the NPV is negative , then available rate of return is less than required rate of return, so project should be rejected. If NPV=0 , then available rate of return is equal to required rate of return and project is to be accepted.