How to Calculate Net Present Value

Net Present Value, commonly referred to as NPV, is a capital budgeting tool used in corporate finance and is designed to help firms assess the financial feasibility of various capital expenditures. Based largely on the time value of money, NPV compares the value of the initial investment to the cash flow generated over a number of years. An NPV greater than 0 supports the acceptance of the project, while an NPV less than 0 supports the rejection of the project.

Over the course of this video we'll walk through how to calculate NPV using the present value formula. Although the process is rather simple once you understand the basics, calculating NPV can be rather time consuming. To ensure accuracy make sure that you are organized when writing out your calculations as one number can certainly affect your results.

[Freedom]

what an outstanding explanation in simple terms. For someone starting afresh in FM, this is simply remarkable. The rationale quoted clarified all my questions. Extremely grateful to you for your explanation

[xXdoblodigitalXx]

What my professor failed to teach in 9 months you have taught me in 16 minute's. You Sir deserve a cookie!

[coachlaSpeak]

I seriously enjoyed your presentation. My homework assignment is due in 2 days and I was lost. Your presentation was right on the spot. Thank you.

[yvesburtworthington]

I am a public health major taking an economics class. Thanks a bunch! Great clarity.

[Alanisbusinessacademy]

Glad you liked the video! I do have several other videos on capital budgeting if you're interested. Hope to hear from you again soon.

[stephaniepham]

What my CPA level teacher couldn't teach in 1.5 hours was learned in 16 minutes. Amazing. Thank you. This helped me so much :)

[chrishawkins]

I was struggling with this formula until watching this video. Simplified presentation. I have never been great at math but this was simple to learn due to the way it was presented.

[Alanisbusinessacademy]

You're welcome. Glad you found the video useful.

[trishmcelveen]

This video was awesome. I'm taking an online Healthcare Finance class. I was so lost in how to calculate NPV. You put it in terms that were so simple. This video help me to answer my discussion question for the week. 

[ukg_odissi]

Excellent! For someone who has no background whatsoever and switching to Finance, this was very helpful. Thank you for the detailed and simple explanation.

[flonstuorex]

man!! best class ever!! damn, , i wish my classes were just as clear, lucid, and good as this one. thank you Sir!! ill come back with a lot of questions. that's it

[Alanisbusinessacademy]

Thanks Peter! New videos come out Monday's at 8:00 a.m. P.S.T. I have no plan on discontinuing that at this time.

[Alanisbusinessacademy]

It depends upon your situation. If you only wanted to estimate the impact of inflation on your future cash flows then you would use the inflation rate. However for capital budgeting projects the discount rate must account for the time value of money and what you give up as a result of not having the money now. Meaning if you had the money in your possession what would you likely earn on it? You can also add in the inflation rate to account for diminished purchasing power as well.

[Alanisbusinessacademy]

That's awesome Ram! I'm glad you got all of your questions answered. Best of luck to you!

[julioespina]

This is such a lifesaver. Thank you so much for making this clear. Your videos really helped me a lot improve my work in Business Development.

[Alanisbusinessacademy]

It's also common for firms to use a cost of capital, which the return that would be needed on the project to make it worthwhile. Assuming NPV is greater than zero and the cost of capital is calculated accurately, this would be an acceptable project. Hope this helps Arijit.

[alexandracano]

Just learned everything I needed for my final tomorrow through your youtube channel -- THANK YOU

[machinegunjessy]

This really really helped me on my finance class. Excellent video Alanis, Excellent. 

[patekoent]

Thanks for this video, it explains clearly what I am studying in economics.

[evilxcupcake]

Yayy you helped me do my homework and I have a Finance Quiz tomorrow. Thanks man!