Talk:Net present value
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[edit] Formula
Corrected the formula. The formula does not match the example and formulas I found in text books. Instead of 
it should be 
If not, T0 in the example would be wrong. —The preceding unsigned comment was added by 134.130.104.136 (talk) 13:49, 22 October 2006 (UTC).
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- t0 is the period you already have results for, i.e. the period just past. Do you really want to discount last period's cash flows by the discount rate? You should only discount future cash flows. Am I missing something? --JHP 09:04, 16 March 2007 (UTC)
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- t0 is the current period. Often this is the period in which the initial investment is made. The discount rate at time zero is 1 (i.e., no discount). The summation in the formula can, therefore, include t=0. An alternative -- as shown now -- is to start the summation at t=1 and add a separate C0 term.
[edit] Without Title
added "and no cash inflow for the 12 months of Year 0." It makes the example more complete, and highlights that cashflow in applies to Year 0 just as it does for years 1 to 6. The first 12 months of a projects life is Year 0 and many projects do generate cash within the first 12 months of life.
Removed "and no cash inflow for the 12 months of t=0" as previous poster has misunderstood the time periods. This project does generate cashflow in during the first 12 months, and that is what is shown at the end of that first year as the entry for t=1.
[edit] Questions
Why is it $5000 / 1.10^1 and not $5000 * 0.9? If I'm adjusting for inflation and the inflation rate is 10% the money would be worth $5000*0.9 after one year.--Jerryseinfeld 18:32, 18 July 2005 (UTC)
- This is because you want to know how much money you need today to buy later a product that will be priced 10% more. If the price today is $4545,45, after the period of time which inflation is 10%, the product will cost $5000 ($4545,45 * 1.1). It's just the inverse operation.
From memory, NPV is a method of comparing the financial return of a project to the return on the same cash in a term deposit. Liberator 09:38, July 19, 2005 (UTC)
I have looked at several people's attempts to try to explain what NPV is, and nobody gets it right. The best explaination I have found is in Brierly and Myers textbook, the title I forget.
I think it would be better to start with a simple explaination along the lines of -
You have £100 which you place in a savings account for one year. This account has, for the sake of argument, a 10% interest rate. Thus after one year you get £110. Therefore, £110 one year in the future is worth the same as £100 now, at a 10% discount rate.
Actually, this is a description of present value. NPV would be £110-£100=£10.
This article ought to refer to PV, (with a link) and then point out the difference between PV and NPV.
On the Danish Wikipedia we're having a discussion whether the term also refers to a serie of previous payments - and not only future payments? Personally I haven't meet the expression in such connection. Have anybody else perhaps? --83.91.231.222 16:01, 31 January 2006 (UTC)
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- The math would work, but it would be simplier just to use future value calculations here, e.g. $100/ (1.10)^-3 = $100 * 1.10^3. NPV is in essence a forward looking tool so the past is irrelevant (sunk costs). Somebody's thinking though. Smallbones 18:01, 5 March 2006 (UTC)
[edit] Restructuring, debate
This article is a bit of a mess. can someone go ahead and clean up the bit with the excel sheets? I know it represents the information, but I'm sure a better screenshot/diagram could be used. EmileVictor 00:06, 3 April 2007 (UTC)
[edit] Is there something wrong with this calculation?
A while ago I had posted a link to the finance wonk's version of net present value calculation at http://finance wonk.blogspot.com/2006/05/present-value-analysis-fundamentals.html
(Remove the space in the first word in the address to use the link, the blacklist kills it here too!)
Recently it was removed and I was notified the site had been blacklisted?
Did I do something wrong? Or is something wrong with the analysis on the destination site?
Looking at the finance wonk page (I haven't reread it in detail) it still looks like a neat runthrough and I like the plots, they do a lot more for me than the equations on the current wikipedia page. Especially the third and fourth ones.
I also like the discussion of how to do NPV in excel, although I see someone has found a possibly better site for that and added it to external links (cool!).
It still looks like the plots contribute a lot, I would add them into the Wikipedia write up except that it would violate copyright since that site obviously owns them (or so I assume).
I read Wikipedia's policy on external links and the link would seem to qualify on the basis of the cool plots alone, and financewonk doesn't ACTUALLY show up on the blacklist (http://meta.wikimedia.org/wiki/Spam_blacklist) so I can't even tell if there's an overall site problem or what.
Mostly I'm intrigued by the process and hoping the person who did the blacklisting/removal could comment. Is it because the blogspot page has google ads on it? There is hardly any of it and it's kind of out of the way, but I could see if that were a policy.
Full disclosure -- I do know the guy who writes that page. I consider a (small) handful of his work link-worthy, most of it being rather more specific and of limited application.
[edit] The controversy of the formula
Have a look at this page
http://www.investopedia.com/terms/n/npv.asp —The preceding unsigned comment was added by 72.52.66.10 (talk) 13:49, 8 January 2007 (UTC).
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- Fixed. Although, I don't know why you subtract last period's cash flows, unless it's because you are spending it to buy capital equipment. That would make sense for capital equipment purchases, but not for financial asset purchases. Perhaps this needs to be explained in the article. --JHP 09:10, 16 March 2007 (UTC)
[edit] Interest Rate v Discount Rate or Discount Factor
In the body of the page we talk a lot about interest rate applied to the cash flows. I am not comfortable with that. It implies that the discount factor is somehow directly linked to interest rates. I prefer to use discount factor in the body. I believe that depending on the context of the analysis, the discount factor may or may not be related to some interest rate. Comments?Kenckar 15:31, 26 March 2007 (UTC)
- Agree, very good point. Be bold and edit! It would be good to sign your comments.--Gregalton 18:23, 27 February 2007 (UTC)
