Supply Chain Concepts
Net Present Value
Major Topic Area: accounting
Net Present Value (NPV) is one method for evaluating the financial viability of a project. In general, a large NPV indicates that a project has a large financial return for the organization. NPV is calculated by first converting anticipated annual benefits into today's dollars. This takes into account the time value of money. For example, $100 of benefits paid today is worth more then $100 in 2 years. After the benefits have been calculated, the NPV is obtained by subtracting the project costs.
EXAMPLE:
Assume a simple project that cost $10,000 and is expected to pay benefits of $5,500/year for 2 years. using a 10% return table, the benefits in today's dollars are:
| year | benefit | factor | today's value |
| 1 | 5,500 | .909 | $4999.50 |
| 2 | 5,500 | .826 | $4543.00 |
| TOTAL | $9542.50 |
NPV = $9542.5 - 10,000 = -457.50
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