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Net Present Value (NPV)

AnalyticsTrade Team
AnalyticsTrade Team Last updated on 26 Apr 2023

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Net Present Value (NPV)

Net Present Value (NPV) is a financial term used to measure the profitability of an investment. It is calculated by subtracting the initial cost of the investment from the present value of the expected cash flows. The result is the net present value of the investment, which is the amount of money that the investor would receive if the investment were made today. NPV is a useful tool for investors to compare different investments and decide which one is the most profitable.

History of Net Present Value

The concept of Net Present Value was first developed by Irving Fisher in the early 1900s. Fisher was a renowned economist and mathematician who was interested in the concept of time value of money. He proposed that money has a different value depending on when it is received. This concept was later expanded upon by John Burr Williams, who developed the formula for calculating the present value of future cash flows.

The concept of Net Present Value was further developed by economists such as Franco Modigliani and Merton Miller in the 1950s. They proposed that the value of a company is determined by the present value of its future cash flows. This concept has become the basis for modern financial analysis and is used by investors to evaluate the profitability of investments.

Table of Comparisons

Investment Initial Cost Present Value of Cash Flows Net Present Value
Investment A $1,000 $1,500 $500
Investment B $2,000 $2,000 $0
Investment C $1,500 $1,000 -$500

Summary

Net Present Value (NPV) is a financial term used to measure the profitability of an investment. It is calculated by subtracting the initial cost of the investment from the present value of the expected cash flows. The concept of Net Present Value was first developed by Irving Fisher in the early 1900s and has since become the basis for modern financial analysis. For more information about Net Present Value, you can visit websites such as Investopedia and The Balance.

See Also

  • Time Value of Money
  • Discounted Cash Flow
  • Internal Rate of Return
  • Payback Period
  • Capital Budgeting
  • Cash Flow
  • Risk-Adjusted Return on Capital
  • Return on Investment
  • Cost of Capital
  • Opportunity Cost

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