Net present value. Present value

In modern economic terminology, quiteit is often possible to come across a term such as “net present value”, meaning the calculated value, which is used when comparing different investment options.

One of the most important and commondecisions made by business entities is a matter of investment in other enterprises. Thus, every year millions of rubles are invested in factories or their equipment, which will function and bring additional profit for many decades. The future cash flow that investment can bring is often somewhat uncertain. And if the plants or factories are already built and do not bring the expected profit, then the investor will not be able to disassemble and resell them in order to compensate for the investments. In this case, the business entity (investor) bears irretrievable losses.

Terminology

Net present value characterizesthe current amount of cash resources needed to receive in the future income equivalent to its counterpart derived from the implementation of a specific investment project. For example, there is a deposit rate of 10%, then 100 rubles will bring 110 rubles at the end of the year. From the standpoint of analyzing the economic efficiency of a deposit of 100 rubles on a deposit or in an investment project that can bring the same 110 rubles, the present value will be the same.

There is also an investment project profitability index - this is the result of dividing the net present value by the total value of discounted investments (investment costs).

Determination of the feasibility of investments

При принятии инвестиционного проекта более чем на One year benefit from such investments can be determined by bringing the future funds received at the end of the year to the start date of the project. This determines the net present value, which should “return” to the investor. This amount is compared with the projected costs, but when conducting such an assessment, it is necessary to take into account the “pitfall” in the form of interest capitalization. That is, dividends to the investor are paid one-time at the end of the year, but the bank can pay interest on a monthly basis. That is why the net present value when conducting a comparative analysis is determined by different formulas, and in the case of a financial institution it is necessary to take into account the monthly capitalization of interest on the deposit.

In the economic literature can be found andsuch an “academic” formulation: the net present value of an investment project is a positive balance of financial resources received by all monetary receipts and expenditures. Its amount is reduced to the initial time point (the start date of the investment project).

The result shows the size of the monetarythe amount that an investor can get after the project. Often, the current value reflects the total profit of the investor, but in this case the residual value of the project itself should not be taken into account.

Net present value of the project: calculation formula

So, when calculating this indicator, the following formulas are used:

• NPV = SUM (CF_t / (1 + and)^t);
• NPV = -IC + SUM (CF_t / (1 + and)^t),

Where:

t is the number of years;
CF - payment in t-years;
IC - invested capital;
i is the discount rate.

Discount rates

Чистая текущая стоимость может быть достоверно It is determined only if the discount rate is chosen correctly. Based on the value of this indicator, you can find the corresponding coefficients for the period for which the analysis is carried out.

Only as a result of determining the valuecash flow receipts and expenses, the net present value can be determined as the difference between these two values. As a result, this indicator can be both positive and negative.

Let us dwell on its values:

• a positive value will show that in the billing period cash receipts in discount terms will exceed the same amount of investments, and this contributes to an increase in the value of the business entity;
• a negative value indicates the absence of the desired rate of return, which leads to certain losses.

Consideration of alternative investment options

Often investors before investing their ownfunds in a particular project ask themselves the question: what is the discount rate the company should use when calculating the net present value? The answer depends on the availability of alternative investment opportunities. For example, sometimes instead of a certain investment option, an enterprise uses its financial resources to acquire a different type of capital that can bring greater profit. Or a business entity acquires bonds, which are characterized by the guaranteed availability of its own profitability.

Equal Risk Investments

There is such a thing as "similar"investments. These are investments that have an equal level of risk. It is known from theory that the higher the risk of an investment, the higher the level of income, and, accordingly, the net present value. Therefore, an alternative investment in this project is the income for which it is possible to receive it in the same amount with the investment of funds in another project or asset with the same level of risk.

Для оценки степени риска инвестиций необходимо suggest the existence of a project that is not associated with any any risk. Then the risk-free income is taken as the alternative value of investments. An example of such income is the purchase of government bonds. When calculating a project for ten years, a business entity will be able to take advantage of the annual interest rate on relevant government bonds.

Summing up the stated material, it is necessaryIt should be noted that this economic indicator quite successfully helps the investor in determining the feasibility of investing free funds in one or another production.