NPV estimates a company's future cash flows of the project. It then discounts them into present value amounts using a discount rate representing the project's capital costs as well as its risk. This number is deducted from the initial amount of cash needed for the investment.
What does NPV mean in project management?
*A project's net present value (hereafter NPV) is defined as the sum of the discounted value of all receipts minus the sum of the discounted value of all expenditures. All discounting is to the beginning of the project. A rate frequently used for discounting is the firm's cost of capital.
How is NPV calculated in PMP?
Generally calculated using formula PV = FV / [1+i] ^n, where FV = Future value, i = rate of interest, and n = number of years (^ signifies an exponent). Net Present Value is the cumulative sum of PV.
Why is net present value important to a project?
Net present value, or NPV, is used to calculate the current total value of a future stream of payments. If the NPV of a project or investment is positive, it means that the discounted present value of all future cash flows related to that project or investment will be positive, and therefore attractive.
How do you select a project using NPV?
- Independent projects: If NPV is greater than $0, accept the project.
- Mutually exclusive projects: If the NPV of one project is greater than the NPV of the other project, accept the project with the higher NPV. If both projects have a negative NPV, reject both projects.