Present Value (PV):

Present Value or PV is the value of the investment in today's terms. It is the value of future cash flows of the project in today's dollars.

**Benefit Measurement Methods**under the Project Selection Methods tool and technique which is used for creating a Project Charter.

__Discounted Cash Flow which__calculates Present Value.

The formula for calculating a Present Value is

PV = FV/(1 + i)^{n}

where

^{}

PV - Present Value to be calculated

FV - Expected Future Cash inflow

i - Notional Interest or Expected Rate of Interest

__Net Present Value:__

This is another interesting twist to calculate the Net future income/future cash inflow of the project in today's dollars. There is no big difference or additional concept to remember here. This is just a sum of all the expected Present values subtracted by the investment. For example, if we assume that the following are the given values.

Invested Amount : $5,00,000

Income Expected (Future Value)- 1 Year : $200000

Income Expected (Future Value)- 2 Year : $300000

Income Expected (Future Value)- 3 Year : $100000

Rate of Interest : 5% per annum

Now calculate the Present value for every year with the Present Value (PV) formula.

Year | Future Value | Calculation | PV |

1 | $200000 | 2,00,000/(1 + .05) | 190476.2 |

2 | $300000 | 3,00,000/(1 + .05)^{2} | 272108.84 |

3 | $100000 | 3,00,000/(1 + .05)^{3} | 86383.76 |

Total NPV (For 3 years) = 5,48,968.8 | |||

NPV for the project = Total NPV (For 3 years) - Original Investment = 5,48,968.8 - $5,00,000 |

So the final NPV is 48,968.8.

And the formula for calculating the Net Present Value is,

NPV = PV_{1}+ PV_{2}+ PV_{3}.. + PV_{n}- Invested Amount

According to the theory of NPV if the calculation of NPV yields a positive value or more than zero, then it is expected to make profit. It can get a go recommendation if all other factors look good. Additional points to remember are like,

- NPV assumes that the cash flows are re-invested at the cost of capital. ie, the same interest rate
- If NPV calculation is greater than zero accept the project. Otherwise reject the project
- Another note is that projects with high returns early in the project are preferred over the ones with lower returns early in the project.

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