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Net present value (NPV), also known as net present value or NPV, is the value at the present time of a series of cash flows that will occur at future points minus the initial investment to generate these flows.

A cash flow to be received at a future point in time is generally worth less than the same cash flow at the present time. The cause of this discrepancy is that current money can be invested immediately to generate returns while future money cannot. This is why it is understood that it is better to charge

In order to be able to buy an amount of money at a future point in time with the value of money at the present time, a discount rate is applied to future money. This makes it possible to calculate the present value of an amount of money. This discount rate is known as the interest rate when it is used in reverse to calculate the future value of a present amount. The formula relating the present value (PV) to the future value (FV) is as follows:


In order to be able to make investment decisions, it is necessary to correctly evaluate the different alternatives that are presented to us. And for this we must have the appropriate mathematical technique that allows us to make that valuation. In this article we will explain how to use NPV and IRR to value an investment.

The NPV is the method consisting of discounting at the present time all the cash flows that the investment will bring us, with a discount or discount rate that takes into account the average cost of the capital used to finance the project (WACC or Weight Average Cost of Capital).

Let’s see how it works with a simple example. Let’s imagine that we have the opportunity to buy an apartment on the beach, which is going to cost us 100,000 €. The expenses for deeds, taxes, registration and other costs in the acquisition amount to 10,000 €.

Thus, the total cost of the house is 110,000 €. And the average cost of capital will be 2.09%. – Given that 50.000€ of equity have an opportunity cost of 1% and the remaining 60.000€ that we have financed have a financial cost of 3%.

net present value

What is the Internal Rate of Return (IRR)? What is it used for? In the following column we are going to compile all the information about its meaning, calculation and examples about the Internal Rate of Return (IRR).

The Internal Rate of Return or IRR allows us to know if it is viable to invest in a certain business, considering other investment options of lower risk.  The IRR is a percentage that measures the viability of a project or company, determining the profitability of the updated collections and payments generated by an investment.

The IRR transforms the company’s profitability into a percentage or rate of return, which is comparable to the rates of return of a low-risk investment, and thus allows knowing which of the alternatives is more profitable. If the profitability of the project is lower, it is not advisable to invest.

Today more than ever, it is necessary to have parameters that allow us to understand the value and risk of an investment, in order to mitigate the current climate of uncertainty in the market.

net present value

The Net Present Value (NPV) and the Internal Rate of Return (IRR) are two concepts of financial mathematics that allow the evaluation of investment projects. On the one hand, NPV arises from discounting the cash flows generated by a project over time at a rate K, which is the cost of the project. On the other hand, the IRR is the rate at which the cash flows must be discounted so that the NPV is 0. The criterion followed with this method is as follows:

We are going to see it with a simulated case. We remind you that you have available the excel template NPV and IRR in the finance section, which is the one we are going to use to carry out this practical example.

Having these two points clear, we will have initial expenses of 6,000 euros and a recurring expense during the 24 months of 18,407.75 euros. As for the income there is no doubt, it is 20,000 euros per month for 24 periods.    Now, with the help of Excel, we will obtain the NPV and IRR of this project. The cash flows derived from this project are as follows:

Por Sofía Salome

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