Project Selection Formulas
Future Value
Present Value
Net Present Value
Payback Period
Benefit Cost Ratio (BCR)
Return on Capital (ROC)
Economic Value Add Benefit Measurement (EVA)
Opportunity Cost
Working Capital
Return on Investment (ROI)
Discounted Cash Flow (DCF)
Depreciation
Expected Monetary Value (EMV)
Related Articles
Net Present Value
$Net Present Value$ or $NPV$ is the difference between the present value of cash inflows and the present value of cash outflows. It is the potential change in an investor’s wealth caused by that project while time value of money is being accounted for.
Formula
\begin{equation} NPV=\displaystyle\sum_{t=1}^{T} \frac{FV_t}{(1+r)^t} – C_0 \end{equation}
Where:
$NPV$=Net Present Value
$FV$=Future Value of cash inflows, at time t
$C_0$=initial investment
$r$=interest rate
$T$=cash flow period
Explanation
- The NPV decision rules: $NPV>0$, accept project; $NPV=0$ accept or reject project; $NPV
- For the PMP® exam, you will not likely have to calculate NPV. You just need to know that the project with the highest NPV provides the more favorable financial investment.
Source: Project Management Institute (2017). A Guide to the Project Management Body of Knowledge (PMBOK® Guide). 6th ed. Newtown Square: Project Management Institute.
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