Simple Steps for computing NPV:
1st Step: To find out Discount Rate:
This rate might be 8 or 9 percent or above according to the financial market condition.
2nd Step: To compute Present Value of Cash outflow or Initial Investment
It is computed just by multiplying cash outflow with the current value of discount rate. When we invest today, and then need not multiply since today investments means PV of Cash outflow.
3rd Step: To compute the Present Value of Cash inflows or gain before depreciation and after tax.
We can compute PV of cash inflows by multiply current value of discount rate.
PV of Cash inflows = Cash inflows X Factor Value of Discount Rate
(For illustration, when we have to receive today 0.90 $ rather than $ 1. Then it will automatically $ 1 after 1 year, therefore when we multiply this 0.90 $ with Cash inflow, then cash inflow will become the amount that we receive now not in future. )
4th Step: To compute Net Present Value
NPV = Present Value of Cash inflow – Present Value of Cash outflowCalculation of NPV in case of Inflation:
In case of inflation, we have to find out real rate from nominal or discount rate and inflation rate.
In this part, the introduction about how to get total present value of cash flows if inflation rate is specified. It is very simple by employing excel formula. Assume that you have to purchase machine of 10 million dollars. This is cash outflow and then after 1 year you have to receive cash inflows. For computing net present value, you require real rate. When Nominal rate or discount rate is 11% and inflation is 5%, then you have to compute real rate in excel sheet by employing the formula given below:
Real rate = (1 + inflation rate) / (1 + inflation rate) – 1
Now we compute present value of cash inflow and present value of cash outflow on the base of real rate.
Latest technology based Finance Online Tutoring Assistance
Tutors, at the www.tutorsglobe.com, take pledge to provide full satisfaction and assurance in Finance help via online tutoring. Students are getting 100% satisfaction by online tutors across the globe. Here you can get homework help for Finance, project ideas and tutorials. We provide email based Finance help. You can join us to ask queries 24x7 with live, experienced and qualified online tutors specialized in Finance. Through Online Tutoring, you would be able to complete your homework or assignments at your home. Tutors at the TutorsGlobe are committed to provide the best quality online tutoring assistance for Finance Homework help and assignment help services. They use their experience, as they have solved thousands of the Finance assignments, which may help you to solve your complex issues of Finance. TutorsGlobe assure for the best quality compliance to your homework. Compromise with quality is not in our dictionary. If we feel that we are not able to provide the homework help as per the deadline or given instruction by the student, we refund the money of the student without any delay.
Start Excelling in your courses, Ask an Expert and get answers for your homework and assignments!!