Using a Present Value Calculator to Evaluate
Investment Opportunities

Net Present Value (NPV) or “present value” is the current value of a future payment or series of future payments. To arrive at the net present value, these future payments are discounted to account for the time value of money and the risk associated with future payment streams. The net present value calculation can apply to both corporate and personal finance and can provide a powerful tool for making investment decisions. If the NPV of a prospective project or an investment is positive, yopu may have found a good opportunity. A negative NPV indicates a project or an investment that should be rejected.

In order to understand present value, it is important to be familiar with the time value of money, which says that money available to you today is worth more than the same amount of money at some point in the future. This is due to the earning capacity of money, through investing, and the elimination of the risk associated with waiting for money you expect to actually be delivered to you. This is idea is one of the core principles of finance.

When calculating the NPV, the discount rate (the rate that is used to discount future cash flows to present values) is an important variable in the calculation. A higher discount rate is used to conduct a conservative evaluation. A common approach for arriving at a discount rate is in determining what the capital might return if it were used for an alternative project or investment. Many investors will only consider an investment that offers a specific rate of return. For these investors, this is the discount rate (often referred to the “hurdle rate” in this cases) that would be used to evaluate the investment.

The dividend discount model is an approach to stock valuation that leverages the net present value method. Under this approach, (expected) future dividend payments are discounted to present value in an effort to determine whether or not that stock is currently undervalued
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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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