ABSTRACT
The underlying concept of net present value (NPV) is that if cash to be received in the future were received now, the cash could be invested to earn interest (return), or it would not be necessary to borrow money now and to pay interest (cost of capital). In addition a future cash flow bears the risk of not being paid by the debtor (risk) and finally the nominal value of a cash flow will correspond to a lower purchasing value in the future than now, according to the general price increase (inflation). NPV determines the sum of future cash inflows related to a project, after having discounted them by an appropriate rate of interest; it then deducts the initial cash outflow. The NPV method also allows a sensitive analysis to be carried out where the estimated selling price, cost of capital, life of the project, initial cost, operating costs, sales volume, and the estimated level of risk can be varied in order to observe their effects on the NPV.
