When companies look into making long-term investments, they need to consider the timeline of their project and how money changes over time. Money in an account now is worth more than money in the future because the account holder could use that money now to make more money, whether by running a business or in a low-risk investment. Compensating for this and inflation growth allows the company to look at different projects and compare their net present values to make business choices. A few calculations will let you compare different potential investments, but the net present value (NPT) is one of the most useful numbers.

## What Is Net Present Value?

Net present value isn't the kind of thing you can scribble down on a napkin and add up yourself; it's a complicated summary function, which needs a financial calculator or a spreadsheet to be fully understood. Overall the equation reads as: **Net Present Value = the Sum of [ (Year n total cash flow) / ( [1 + Discount rate]^n )] from years 1 through n**, for each year where cash flow must be discounted.

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To examine this conceptually, you'll need to know some terms and do some estimating. The sum of cash flow for **year 5 of a 10-year project** won't be an exact number you know. Instead, it will be an estimate based on the ongoing costs and expected revenue of the given investment. As such, you'll have to engage in project planning to be able to predict values that are accurate enough for the situation.

Your project will be given a discount rate: a benchmark rate your project is to be compared against. This might be the interest paid on debt or a federal low-risk investment return; it might be the rate of return that investors or a parent company expect to see. The discount rate will be different for each organization.

## Additional NPV Comparisons

Net present value compensates for the fact that **$10,000** right now is more useful, and thus worth more, to a company than **$10,000** will be **5 years** from now. In fact, it can be used to create some interesting comparisons.

If **year 5** sees **$10,000** of total cash flow at a discount rate of **10 percent**, the net present value of **year 5's income is ($10,000) / [ (1 + 0.10)^5 ]. (1.10)^5 is 1.61**, making **($10,000)/(1.61) = $6,211**. So at a discount rate of **10 percent**, the **$10,000** of income in **year 5** is only worth **$6,211** in the present.

## NPV on TI-84 and TI-83 Calculators

Some Texas Instruments (TI) calculators, including the TI-83 and TI-84 families, can be used to calculate the net present value once all the parameters have been inputted. These graphing calculators can receive values in a table setting, allowing them to make calculations like formal spreadsheets; they have a function called NPV that you can use with the information you have to determine net present value.

Enter the Finance menu in your calculator and scroll until you see NPV as an option to determine NPV on TI-84 or TI-83. Press enter to choose it, and you'll see the NPV function appear on your screen. The format to enter information is as follows: NPV(DR, SV,{a,b,c,d,e})

Where DR is the starting discount rate or the desired rate of return, SV is the starting value of the project (which can be **0** if you are looking at a simple net present value calculation, or alternately represents the initial investment amount if you are looking at a break-even point) and a through e represent the net cash flows for each year.

**Consider also:** Advantages & Disadvantages of Net Present Value Method