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Chapter 14

Net present value (NPV)

4.1 NPV technique

Typically an investment opportunity will involve a significant capital outlay initially with
cash benefits being received in the future for several years. To calculate the NPV:

 convert all future cash inflows into present value terms

 deduct the initial investment.

The NPV represents the surplus funds (after funding the investment) earned on the
project. This tells us the impact the project has on shareholder wealth.

Decision criteria

 Any project with a positive NPV is viable. It will increase
shareholder wealth

 Faced with mutually-exclusive projects, choose the project with
the highest NPV

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