Accounts and Finance

"NPV or net present value is used in capital budgeting to analyze the profitability of a project or investment and is calculated by taking the difference between the present value of cash inflows and present value of cash outflows over a period of time i.e. it determine the current value of all future cash flows generated by a project, including the initial capital investment. And, is widely used in capital budgeting to establish which projects are likely to turn the greatest profit.

     Net Present Value = (Cash flows) / (1+r)i

where,

i= initial investment,

Cash flows= cash flows in the time period,

r  = discount rate, and

i = time period.

The IRR or internal rate of return is a metric used in capital budgeting to estimate the profitability of potential investments. It is also a discount rate that makes the net present value of all cash flows from a particular project equal to zero. Also, IRR calculations rely on the same formula as NPV does, i.e.

                              T

      IRR = NPV =  ∑   Ct / (1+r) to the power t - Co  = 0

                            t=1

 where,

Ct = NPV during the t period,

Co = total initial investment costs,

r = discount rate, and

t = number of time periods."