• Skip to primary navigation
  • Skip to content
  • Skip to primary sidebar
  • Skip to footer
EDUCBA

EDUCBA

MENUMENU
  • Resources
        • Investment Banking

          • Investment Banking Jobs Offer
          • Current Ratio
          • Discounted Cash Flows
        • Investment Banking
        • Finance Formula

          • CFA vs FRM
          • Net Working Capital Formula
          • Free Cash Flow to Firm
        • Finance Formula
        • Valuation

          • Equity Research Career
          • Return on Equity
          • Methods to calculate WACC
        • Finance Valuation
        • Others

          • Resources (A to Z)
          • Accounting Fundamentals
          • Corporate Finance Basics
          • Financial Modeling in excel
          • Credit Research Fundamentals
          • Asset Management Tutorial
          • Trading for dummies
          • View All
  • Free Courses
  • All Courses
        • Certification Courses

          Financial Analyst Course
        • All in One Bundle

          Financial-Analyst-Bundle
        • Investment Banking Training

          Investment-Banking-Training
        • Others

          • Financial Modeling Course
          • Equity Research Course
          • Private Equity Training Course
          • Business Valuation Course
          • Mergers and Acquisitions Course
          • View All
  • 250+ Courses All in One Bundle
  • Login

Present Value vs Net Present Value

Home » Finance » Blog » Corporate Finance Basics » Present Value vs Net Present Value

Present-Value-vs-Net-Present-Value

Difference Between Present Value vs Net Present Value

Present Value

Present Value is basically the discounted value of future cash flow at a specific discounting rate. If the future cash flows are spread over multiple years than present value is some of the discounted value of future cash flows.

Formula for calculation of Present value:

Start Your Free Investment Banking Course

Download Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

Present Value (PV) 1

Present Value (PV)= (FV1 / (1+r)) +(FV2/(1+r) ^2)   + (FV3/(1+r) ^3) +———+ (FVn/(1+r) ^n)

Wherein FV is cash flow in future years and r is the discounting rate.

N= represents the year of the cash flow

Demonstration for Calculation of Present Value

Present Value of USD 100 in two years’ timeline with a discount rate of 8% is as below:

  • Present Value (PV) = Future Value (FV)/ (1+r) ^n
  • Present Value = 100/ (1+8%)^2
  • Present Value = 100/1.1664
  • Present Value = USD 85.73

So the present value of USD 100 which is expected to be received after 2 years at present is USD 85.73. Therefore, a present value of future cash flow is always less than the actual cash flow in that specific year because of the concept of the time value of money.

Present Value is very useful in real-world applications in estimating the present value of future requirements such as house EMI for a house loan, education loan for children. Present Value concept is widely used in bonds pricing and valuation in Corporate Finance.

Popular Course in this category
Cyber Week Sale
Corporate Finance Training Bundle (9 Courses with Case Studies) 9 Online Courses | 35+ Hours | Verifiable Certificate of Completion | Lifetime Access
4.6 (1,885 ratings)
Course Price

View Course

Related Courses
Business Valuation Training (14 Courses, 10+ Projects)Equity Research Training (15 Courses, 6+ Projects)Project Finance Training (8 Courses with Case Studies)

Net Present Value

Net present value is very similar to the present value except for the consideration of capital investments made in the initial year while calculating net present value. Therefore, Net Present Value is the sum of a discounted value of future cash flows less initial investments.

Formula for calculation of Net Present value:

Present Value (PV) 2

Net Present Value (PV)= (FV1 / (1+r)) +(FV2/(1+r) ^2) + —–+ (FVn/(1+r) ^n)- (Initial Investments)

Wherein FV is cash flow in future years and r is the discounting rate.

N= represents the year of the cash flow

Demonstration for Calculation of Net Present Value

 A Company XYZ Corporation makes an investment of USD 100 million in a Project. The estimated cash flows from the project in the next 5 years for the company are as below:

Year 0 1 2 3 4 5
Cash Flow -100 20 25 30 35 40

 Let’s calculate the NPV of the investment for the Project at a discount rate of 8%.

  • Net Present Value= Present Value of Future Cash Flows- Initial Investment
  • Net Present Value = 20/ (1+8%)+ 25/ (1+8%)^2 + 30/ (1+8%)^3 +35/ (1+8%)^4+40/ (1+8%)^5-100
  • Net Present Value = 116.72-100
  • Net Present Value = 16.72

Net Present Value = USD 16.72 million

Applications

The concept of NPV is widely used in capital budgeting, making investment decisions, selection between multiple projects for investment considerations, comparing two investments etc. by finance professionals and investment bankers.

Head To Head Comparison Between Present Value vs Net Present Value (Infographics)

Below is the top 7 difference between Present Value vs Net Present ValuePresent-Value-vs-Net-Present-Value-info

Key Differences Between Present Value vs Net Present Value

Both Present Values vs Net Present Value are popular choices in the market; let us discuss some of the major Difference Between Present Value vs Net Present Value

  • Present Value is basically the sum of the discounted value of future cash flow. However, Net present value is the sum of a discounted value of future cash flows less initial investments.
  • Net Present Value takes into account the initial investment and future cash flows to calculate the incremental value addition. However, Present Value only takes into account the discounting of future cash flows.
  • Present value basically provides an absolute value which is the discounted value of future cash flows. However, Net Present value measures incremental value created due to an investment decision such as net value addition to a Company due to investment in a specific project.
  • Net present value finds much more relevance for Companies and is relatively complex to use than Present Value. Present value is used by individuals in day to day decision making and it is relatively easier to use.
  • Net Present Value helps in discounting the different amount of future cash flows at different time periods with incoming as well as outgoing cash flows and therefore it is relatively complex but much more helpful in decision making than present value.
  • Brief understanding of the concept of Present value is required to understand and calculate the Net present value and both are related to the concept of the time value of money.
  • Present value concept is useful in decision making by individuals in calculating bond prices for investments, loan pricing calculation for various requirements, estimating the present investment value of future requirements etc. However, the Net Present Value concept is mostly used by Companies in making investment decisions, comparing the attractiveness of multiple projects, capital budgeting decisions etc.

Present Value vs Net Present Value Comparison Table

Below is the 7 topmost comparison between Present Value vs Net Present Value

The basis of comparison between Present Value vs Net Present Value Present Value Net Present Value
Definition Present Value is the sum of the discounted value of future cash flow at a specific discounting rate. Net Present Value is the sum of the discounted value of future cash flows net of initial investments made by the Company.
Meaning Present value is the actual value of the stream of future cash flows today.

Present value calculation provides an absolute number and does not provide information on incremental value created by a project or an investment.

Net present value is actually the incremental value addition for any investments made by a company/individual.

Net present value helps in calculating the incremental value added to a company/individual by investing in a project hence helps in decision making for the selection of projects.

Formula Present Value = Future Value (FV)/ (1+r) ^n Net Present Value= Present Value of Future Cash Flows- Initial Investment
Relevance Present value is relevant wherein one wants to calculate the present value of all the future cash flow in today’s date. Net Present Value is relevant in making investment decision wherein Net Present Value represents the incremental value addition of the project due to the investment in that project.
Complexity Present value concept is relatively easier to use and is frequently used by individuals in a day to day life. Net Present Value is a relatively complex concept and generally used by Companies in their capital budgeting and investments decision making.
Interdependency Present value is a concept related to the time value of money, i.e. a rupee received tomorrow is always less than a rupee received today. Net present value is basically derived from the present value concept. To understand Net Present Value one need to understand present value first.
Application Present value concept is useful in decision making by individuals in calculating bond prices for investments, loan pricing calculation for various requirements, estimating the present investment value of future requirements etc. Net Present Value concept is mostly used by Companies in making investment decisions, comparing the attractiveness of multiple projects, capital budgeting decisions etc.

Conclusion – Present Value vs Net Present Value

Both Present Value vs Net Present Value, are tools to make investment decisions, future planning, purchases, borrowings etc. for Companies as well as individuals. Net Present Value provides more effective information in decision making for Companies in comparison to Present Value which is more effective and helpful for individuals in decision making.

Recommended Articles

This has a been a guide to the top difference between Present Value vs Net Present Value. Here we also discuss the Present Value vs Net Present Value key differences with infographics, and comparison table. You may also have a look at the following articles to learn more

  1. Top Most Differences of Finance vs Economics
  2. Capital Gains and Dividends – Top Comparisons
  3. Difference Between Costs and Expenses
  4. Comparison Between Stock vs Equities

Corporate Finance Training Bundle (9 Courses with Case Studies)

9 Online Courses

35+ Hours

Verifiable Certificate of Completion

Lifetime Access

Learn More

0 Shares
Share
Tweet
Share
Reader Interactions
Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Primary Sidebar
Finance Blog Tutorials
  • Corporate Finance Basics
    • Earnings Per Share
    • Capital Structure
    • Corporate Finance Jobs
    • About Corporate Finance
    • Corporate Finance Theory & Practices
    • Mistakes in Discounted Cash Flow
    • Career in Corporate Finance
    • Simple Interest Rate vs Compound Interest Rate
    • Stocks vs Shares
    • Bonds vs Debenture
    • Bull Market vs Bear Market
    • Mortgagee vs Mortgagor
    • Horizontal Integration vs Vertical Integration
    • Money Market vs Capital Market
    • Leveraged vs Unleveraged
    • Dividends vs Capital Gains
    • Present Value vs Net Present Value
    • Qualified vs Ordinary Dividends
    • ROE vs ROA
    • Bond vs Loan
    • Stock Dividend vs Stock Split
    • Audit vs Assurance
    • Coupon Rate vs Interest Rate
    • Growth Stock vs Value Stock
  • Accounting fundamentals (288+)
  • Asset Management Tutorial (36+)
  • Banking (34+)
  • Credit Research Fundamentals (6+)
  • Economics (36+)
  • Finance Formula (307+)
  • Financial Modeling in Excel (10+)
  • Investment Banking Basics (30+)
  • Investment Banking Careers (30+)
  • Trading for dummies (39+)
  • valuation basics (23+)
Finance Blog Courses
  • Online Business Valuation Training
  • Equity Research Certification
  • Project Finance Course
Footer
About Us
  • Who is EDUCBA?
  • Sign Up
  •  
Free Courses
  • Free Finance Course Online
  • Free Online Course Accounting
  • Free Tutorials on QuickBooks
Certification Courses
  • All Courses
  • Financial Analyst All in One Bundle
  • Investment Banking Training
  • Financial Modeling Course
  • Equity Research Course
  • Private Equity Training Course
  • Business Valuation Course
  • Mergers and Acquisitions Course
  • Venture Capital Course
  • CFA Level 1 Course
  • CFA Level 2 Course
  • IFRS Course Training
  • Project Finance Course
  • Hedge Funds Course
Resources
  • Resources (A To Z)
  • Investment Banking Jobs Offer
  • Finance Formula
  • Valuation
  • Accounting Fundamentals
  • Corporate Finance Basics
  • Financial Modeling in excel
  • Credit Research Fundamentals
  • Asset Management Tutorial
  • Trading for dummies
Apps
  • iPhone & iPad
  • Android
Support
  • Contact Us
  • Verifiable Certificate
  • Reviews
  • Terms and Conditions

© 2019 - EDUCBA. ALL RIGHTS RESERVED. THE CERTIFICATION NAMES ARE THE TRADEMARKS OF THEIR RESPECTIVE OWNERS.

EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA
Free Investment Banking Course

Corporate Valuation, Investment Banking, Accounting, CFA Calculator & others

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA

By continuing above step, you agree to our Terms of Use and Privacy Policy.
*Please provide your correct email id. Login details for this Free course will be emailed to you
EDUCBA Login

Forgot Password?

Let’s Get Started
Please provide your Email ID
Email ID is incorrect

Limited Period Offer - Corporate Finance Training Bundle (9 Courses with Case Studies) View More

Limited Period Offer - Limited Period Offer - Corporate Finance Training Bundle (9 Courses with Case Studies) View More