For those not in finance, you would ask, what is the purpose of Net Present Value (NPV) for your business? Well it has many usage. Let me translate NPV in easy understanding:
- To measure the profitability of acquiring an asset or investment. (example: how do you determine whether the premix plant you purchase today will give you profit or loss?)
- Difference between cash inflow and cash outflow (example: the cash you get from your premix plant less the maintenance cost needed,etc)
What is the formula of Net Present Value?
The following formula is taken from wikipedia in which R = cash inflow – cash outflow, i = discount rate (rate of return), t= time period.
So where is the NPV calculator?
You can download it here (click on the download now button). I made this in excel file for one of the clients we consult when I was in wesolve.info.
How do I use the calculator?
You only need to key in these 2 items:
- Cost of Technology Acquisition (the cost you wanna buy that property, plant or equipment)
- Recurring Cost Per Year (the cost you have to maintain that property,plant or equipment)
What information do I get from the calculator?
- Net Present Value of All Costs for 5 years
- Decision factor whether you want to invest or acquire the asset or not through (NPV > 0)
- Cash flow analysis for break even (when you get all your money back after purchasing that asset)
For advanced users, you may ask about the discount rate. You may notice that I set here 12% discount rate and for every year there is a formula in terms of 0.812. This is a tabulated formula. Should you wanna change the discount rate %, just key in the amount into the “Discount Rate” column.
What is a discount rate?
Interest rate Bank Negara charges to the financial institution from the amount it borrows.
How does it effect me, purchasing an equipment then?
The higher the interest rate, the more you gotta pay, hence it could be riskier and your cash flow NPV can be less.
How do you determine discount rate for your OWN NPV? (depends on your value judgement entirely)
- Weighted average cost of capital which is after tax is used for companies to make management decision
- Direct comparison. For example: you want to buy photostat machine A and B. Use the discount rate from B to compare whether A gives you better return or not.
When do I decide whether I should purchase the equipment or invest in something?
When your NPV>0, it shows positive return. If your NPV=0 it’s breakeven. If your NPV<0, then better dont buy buat rugi jer.
For more information on NPV, check out these sites: