CHAPTER 23Calculation 17: Net Present Value
What It Means
If you followed our earlier discussions of present value and discounted cash flow, then you need to take only a small step to understand net present value (NPV). Recall that you performed a discounted cash flow analysis to find the present worth of all the property’s future cash flows at a given discount rate.
Let’s say that you require a 10.5% rate of return on your investment. When you discount all the expected future cash flows back at that rate, the PV that you find as your answer is the amount of cash you need to invest at 10.5% to achieve those future cash flows—with exactly the same timing and amount that you predicted.
The discounted cash flow analysis tells you what the future ...