net present value method
Investment appraisal is carried out with the aid of various financial measures to find an investor's return on investment. Here, we will explore and explain net present value which is one of the discounted cash flow techniques used for analyzing investment. A definition of net present value will be given, followed by a formula that is later used in an example calculation to find the net present value.
Spreadsheet programs are commonly and often used for financial analysis and in this respect you will be informed about the availablity of a net present value spreadsheet function called tadNPV. The tadNPV function may be typed in to a worksheet cell of various offline and web based spreadsheet programs. Excel, OpenOffice calc, LibreOffice calc, IBM Symphony spreadsheet, Office 365 (Web version), and Google Docs spreadsheet are some of the popular spreadsheet programs that support the use of tadNPV to find discounted payback period.
The e-Book
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The contents of the e-Book
This discussion and exploration of net present value is offered to our web visitors as a PDF download. The e-Book contains a thorough discussion of the net present value method to analyze investments. The discussion begins by defining the net present value method and moves on to example calculation using formulas.
The eBook begins with defining two types of annuities: ordinary annuity and annuity due. The former has periodic payments at the end of period and the latter has periodic payments at the beginning of period. It will be shown to you with example calculation that if the payments are in uniform series then shorthand math formulas may be used to find NPV of such periodic payments in constant amounts. The examples used in NPV calculation will include lottery prizes where the winner is given an option to either accept an annual equivalent payments for 20 years or to accept a lower sum of the prize at present. The winner of such a prize would need to be able to find net present value of the stream of payments and then to compare such NPV with the discounted sum that is given as an alternative option. You will get to see the detailed calculations for net present value with tables of discounted annuity payments that are found with the use of PVIF tables.
PVIF Table
Use of such annuity tables are common in finance and banking where in absencse of computer programs you are confronted with manually finding present value of expected future payments. Here a financial table as a PDF file that may be printed and pinned to your desk in office can help ease the task of calculations with paper and pencil
Annuities with irregular payments
The eBook looks further in to ways of finding net present value when the cash flows are not in constant amount. Here you would have to discount each of the cash flows at the discount rate for the particular time period. You will be told of the difference between the cash flows where the first payment is left undiscounted and when the first payment is discounted at time period 1. This sort of analysis is part of discounted cash flow analysis commonly used in capital budgeting and investment analysis.
Different discount rates
In general we use a single discount rate to find present value yet in finance and banking it is common practice that different discount rates are used for each of annuity payments. The eBooks explains the manner in which we may use schedule of discount rates when finding NPV of pensions, loans, provident funds and other financial instruments.
Growing annuity payments
eBook discusses another aspect of annuities when the periodic payment is not in constant amount and such payments either grow or shrink by a discount rate. When payments grow by a constant growth rate, we require new methods in calculating net persent value of such growing or shrinking annuities. This is all explained clearly in the eBook where use of formulas and tables is employed in finding NPV
Perpetuity
The never ending series of payments or annuity payments that go on forever are called a perpetuity. The eBook explains and illustrates the NPV calculation of perpetuities using shorthand formulas.
Continuous compounding of interest
All of the former examples discussed thus far assumed annual or periodic compounding of interest. However the eBook also presents NPV calculations when the interest is compounded on continuous scale also referred to as infinite compounding of interest.
Conclusion
This eBook on NPV by author Abraham A. is a must have for any serious finance professional and student who is eager to learn the various ways of finding net present value.
