Financial Decisions : Net Present Value Essay

789 Words Jul 16th, 2015 4 Pages
LASA 1 – Financial Decisions
Net Present Value Net present value is a numerical calculation that shows the present value of an investment based on expected income from that investment in future years minus the cost of the project. Net present value is calculated by dividing the expected income of a project in each future year by a term equal to one plus a discount rate raised to a power equal to the year. The totals for each year then are added together, and the initial cost of the project is subtracted from that sum to arrive at the net present value. The discount rate represents the time value of money: the amount that could be made by committing the money to other opportunities. Net present value is based on estimates of future company activity and production. Therefore, accurate guestimates are required to project the expected financial gains for the company ("What Does a Positive Net Present Value Mean When Appraising Long-Term Projects?, Chron.com," 2015). The net present value calculation assists managers in making decisions regarding whether an investment or purchase adds value to the company. Comparing the net present value of an investment will assist management in making decisions as to the estimated loss or gains that a project could produce compared with investing it in other sources that generates return on investment equal to the discount rate. Positive net present value of a project indicates that the company can expect to produce more income and the…

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