#### RESIDENTIAL AND COMMERCIAL REAL ESTATE BROKERAGE

##### NET PRESENT VALUE (NPV)

The Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. The NPV is used in capital budgeting and investment planning to analyze the profitability

of a projected investment or project.

NPV is the result of calculations used to find today’s value of

a future stream of payments. It accounts for the time value of money and can be used to compare similar investment alternatives. The NPV relies on a discount rate that may be derived from the cost of the capital required to make the investment, and any project or investment with a negative NPV should be avoided.

#### WHAT IS THE NET PRESENT VALUE?

The mathematical formula for NPV therefore involves finding the discount rate, or interest rate, that sets all the project’s cash flows to an NPV of zero.

#### t = Number of timer periods

An investment with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that only investments with positive NPV values should be considered.  Calculation of the NPV is a two step process.

The following is an example.

#### Identify the discount rate (i): The alternative investment is expected to pay 8% per year. However, because the property generates a monthly stream of cash flows, the annual discount rate needs to be turned into a periodic or monthly rate. Using the following formula, we find that the periodic rate is 0.64%.

#### HOW USEFUL IS THE NET PRESENT VALUE?

The NPV is a financial metric that seeks to capture the total value of a potential investment opportunity. The idea behind NPV is to project all of the future cash inflows and outflows associated with an investment, discount all those future cash flows to the present day, and then add them together. The resulting number after adding all the positive and negative cash flows together is the investment’s NPV. A positive NPV means that, after accounting for the time value of money, you will make money if you proceed with the investment.