Do your parents make investments in assets? Most probably, yes. How do they decide where to invest their hard-earned money? Well, what they do is determine the present value of the returns that the investment will get them in the future. This value is known as NPV (Net Present Value).
The investment decisions are based on it. And, the NPV calculation is somethings that frightens almost every student assigned with a financial accounting assignment. Are you also scared and need help for the same reason? If yes, then this article is all you are required to read. Why? Because here we will share the easy steps to do the tough NPV calculations easily. Eager to know them? Go through the next segment of this write-up with the utmost concentration for knowing these easy-breezy steps.
The Easiest Steps to Calculate NPV in Financial Accounting Assignment
- Step # 1 Note the initial investment: The process of NPV calculation begins with jotting down the initial investment to be made. This is the amount to be paid in the present to acquire an asset. Usually, it is given in the assignment's question itself. We will use $ 100 as our example.
- Step # 2 Discern the discounted rate: This is the investment's rate of return. It is used to discount future cash inflows. The next step of the process is to discern, i.e, identify the discounted rate from the assignment's question. We assume it to be 4% or 0.04.
- Step # 3 Discount the cash inflows: The cash inflows or the amount of returns that the investor expects in the future years is given in the question. We will take it to be $300 for our calculations. You need to discount, i.e., find out its present value using the following formula.
Discounted cash inflows = P/(1+i)t
Where P = Present cash inflow
i = Discounted rate
t= Number of years, 1 for our example
In our example, the present value of cash inflow= $100/(1+0.04)1 = $ 96.15
- Step # 4 Total the discounted cash inflows: In our example, there is a single discounted cash inflow, therefore the total will be the same as the previous step,i.e., 104. But, if your assignment's question has more than one cash inflow, then compute their total by adding them.
- Step # 5 Compute the NPV: Now you can breathe a sigh of relief. Why? Well, this is so because finally, you have reached the last step of NPV computation. Here you only need to subtract the initial investment from aggregate discounted cash inflows to find out the NPV. In the case of our example, the Net Present Value = $96.15 - $100= ($3.85).A negative result signifies that the investment should not be made. If it was positive, then it would be profitable to invest in the proposed asset.
We know, now the NPV computation is the easiest thing to do on the planet for you, but, practice the above-mentioned steps through some sample questions before jumping on the assignment. In case you encounter any difficulty while practicing them, then give this article a second reading to clear the persisting doubts. Lastly, it’s time for us to take your leave with the wish that may you get an A+ in the document.