What is: O Net Present Value (NPV) is a mathematical-financial formula used to calculate the present value of a series of future payments discounting a stipulated cost of capital cost. It exists, because, of course, the money we are going to receive in the future is not worth the same as money in the present tense.
This may seem a bit abstract, but it is not. It happens, just as there is Interest, because of the uncertainty of tomorrow. Money in the future is worth less, precisely because we are not sure we will receive it. Therefore, this calculation just makes this adjustment, discounting the future rates of future cash flow.
When To Use: Normally, NPV calculation (also known as current net worth) is done in project return or company valuation analyzes (valuation). The most famous term for this type of study is economic viability with variations and economic-financial or technical-economic.
How to calculate: In this post, we will show you how to calculate the Net Present Value through Excel, but the mathematical calculation that actually occurs is as follows:
In which, FC means the cash flow of each period, the I'm the discount rate chosen and j = 1. So we are seeing it is each cash flow being divided by the high discount rate to its respective period, since the interest, in this case, is composed.
Discount rate the money this money would have in safe sources, central bank interest rates are often used (SELIC).
In this case, the project had an initial investment of R$ 20.000,00 and then generated R$ 10.000,00 in the next five months. To calculate the NPV, in this case, just choose the cell in which you want to see the result and choose the NPV formula (NPV), select the cells of the desired cash flow and enter the discount rate (the rate must be in the same periodicity of the flow, ie daily, monthly, annual, etc.).
In this case, I put a 10% rate per month and got the NPV: R $ 17.907,87
How to Interpret: This result means that although there is a financial gain of R $ 30.000,00 (Total revenue minus investment), the present value of this future cash flow is worth R$17.907,87. Therefore, it would be worth to "buy" this business or project for any value below the NPV and, would not be worth, any amount above.
Was the importance of this analysis clear? Numbers can fool us! Calculate your project's NPV in minutes!