Q. Diffrence between present values of future cash ?
The difference among the present values of future cash inflows generated by an asset and its cost is known as net present value.
- A financial asset or else a project which has a positive NPV create wealth for shareholders and thus are undertaken.
- Alternatively a financial asset or a project resulting in negative NPV must be rejected since it would reduce shareholder's wealth.
- If one out of a variety of projects is to be chosen the one with the highest NPV is adopted.
The NPV is able to be computed with the help of the following formula:
A1 A2 An
W = ------ + ------ + ------- + ------- - C
(1+K)1 (1+K)2 (1+K)n
W = Net Present Worth
A1, A2,--An = Stream of Cash Flows
K = Appropriate discount rate to calculate risk and time factors
C = Initial outlay to obtain an asset or pursue a course of action.