If you're working on a question you will either be given some discount factors or a set of present value tables to read the discount factors from. All you do is use the discount factors and multiply your cash flow by the corresponding year's discount factor to find the present value for that year. You then total all your present values up to give the net present value. (NB the first cash flow is usually a negative figure as it is the amount spent on an investment and therefore is an outgoing amount. Remember to treat it as a negative number in your calculation).
An e.g. Would be. I am considering spending £10,000 on a piece of equipment on Jan 1st 2005. This will bring in the following cost savings each year: 2005 = £500, 2006 = £400, 2007 =£400. The discount rate is 10% which gives the following discount factors Year 0 = 1.0000, Year 1 = 0.9090, Year 2 = 0.8264, Year 3 = 0.7513. ANSWER = (£10,000) x 1.0000 plus £500 x 0.9090 plus £400 x 0.8264 plus £400 x 0.7513
REMEMBER the outgoing figure at the start is a negative number. If the npv is a positive figure the project is viable.
An e.g. Would be. I am considering spending £10,000 on a piece of equipment on Jan 1st 2005. This will bring in the following cost savings each year: 2005 = £500, 2006 = £400, 2007 =£400. The discount rate is 10% which gives the following discount factors Year 0 = 1.0000, Year 1 = 0.9090, Year 2 = 0.8264, Year 3 = 0.7513. ANSWER = (£10,000) x 1.0000 plus £500 x 0.9090 plus £400 x 0.8264 plus £400 x 0.7513
REMEMBER the outgoing figure at the start is a negative number. If the npv is a positive figure the project is viable.
