Equations · Finance and economics
Net present value
Future cash flows converted into today's money and added up.
NPV = ∑ₜ₌₁ᵀ Cₜ / (1 + r)ᵗ
Aethel says
N P V equals the sum from t equals 1 to T of C sub t over the quantity 1 plus r, to the power of t
What it says
Money received later is worth less than money today, because today's money could be invested. Each cash flow is divided by one plus the discount rate, raised to the number of periods away it is.
A project is worth doing, on this measure, when its NPV after the initial outlay is positive.
Symbol by symbol
| Symbol | Say it | Means |
|---|---|---|
| NPV | N P V | the net present value |
| Cₜ | C sub t | the cash flow in period t |
| r | r | the discount rate per period |
| T | T | the last period |
More on∑Summation (sigma notation)
Where you meet it
Corporate finance, the CFA curriculum and project appraisal.
Questions
How do you say Net present value out loud?
NPV = ∑ₜ₌₁ᵀ Cₜ / (1 + r)ᵗ is read: “N P V equals the sum from t equals 1 to T of C sub t over the quantity 1 plus r, to the power of t.” That is exactly what Aethel says when it meets the formula in a book.
What does NPV mean in Net present value?
NPV (said “N P V”) is the net present value.
What does Cₜ mean in Net present value?
Cₜ (said “C sub t”) is the cash flow in period t.
Can I listen to the equations in my own textbook like this?
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