Net present value - expected valuepayment stream, which is reduced to the value at a specific point in time. Often this value is calculated during the analysis of economic efficiency in the field of investment for future earnings.
What is discounting
It is necessary to define such a concept asdiscounting. This leads to a certain fair value, which is performed at a certain rate. Purely discounted income must be calculated to display the real amount of money available to the subject today, but taking into account the impact of various factors in the future. The basis of such calculations are the following reasons:
- investment of this amount in other income transactions in order to obtain some profit in the future;
- reduced purchasing power of cash and inflation;
- risk of shortfall of expected profit.
Yield: its internal rate
Purely discounted income is the basis forperforming calculations of the rate of return, which gives a characteristic of the return on investment. The internal rate of return is equal to the discount rate, in the presence of which the income becomes equal to zero.
Net present value: formula
Cash flow receipts are mainlysummed up within specific time periods (every month, quarter and year). In other words, the total cash flow equals their sum in all specific steps.
The higher the purely discounted income, the more effective the project. In case of its negative value, the investor may incur losses (low efficiency).
Profit monitoring
The marketing system in any enterprise createsall the conditions for its effective activity in order to increase profits. However, all necessary expenses that a business entity may incur must be taken into account. Thus, any projected profit from the implementation of a project is in the form of the difference of income from its work on perception and without its use.
An example of determining net present value
In enterprises with various activitiesself-respecting leaders give the task to their experts to calculate the net present value. An example widely used in this area of calculation is advertising agencies.
The bulk of advertising revenue ismonetary resources that come from the advertisers themselves. With the introduction of some new project, the amount of revenue should increase. In this case, the calculation of the economic effect is reduced to the summation of the cost of advertising messages received for the services of their placements. With the use of new positioning quality mechanisms (for example, online advertising), image and popularity are being strengthened. If the price for renting the space used for advertising increases, or the cost of placing the advertisement itself rises, it makes sense for the heads of advertising agencies to change its pricing scheme and introduce, for example, the payment of each attracted client.
