How to Calculate Net Present Value with Example?

Net present value is the difference between present value (PV) of cash inflows means initial investment and the present value (PV) of cash outflows mean future value. Net Present value in terms of money can be positive, negative and zero.

Following are the examples of NPV:

Example-1
John have $200,000 and he want to invest money in land. John thinks that the future value of the land would be $350,000. Then

Net Present Value (NPV) = future value of land – present value of land

  • NPV= $350,000 - $200,000
  • NPV = $150,000 ( positive)
From the above example we can conclude that John will get very good rate of return.

Example 2
Maria have $200,000 and he want to invest money in land. maria thinks that the future value of the land would be $190,000. Then

Net Present Value (NPV) = future value of land – present value of land
  • NPV= $190,000 - $200,000
  • NPV = -$10,000 ( Negtive)
From the above example we can conclude that the future value of the cash flows is less than the initial investment and Maria will get very less rate of return

Example: 3
Paul have $200,000 and he want to invest money in land. Paul thinks that the future value of the land would be $200,000. Then

Net Present Value (NPV) = future value of land – present value of land
  • NPV= $200,000 - $200,000
  • NPV = 0 ( Zero)
From the above example we can conclude that the future value of the cash flows is equally to initial investment and Paul will get the initial investment money.

General formula of NPV



Where T = Time period Ct = Cash inflow Co = Cash Out flow

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