net present value profile

(noun)

a graph of the sum of all cash inflows and outflows adjusted for the time value of money at different discount rates

Related Terms

Examples of net present value profile in the following topics:

  • NPV Profiles

    • The NPV Profile graphs the relationship between NPV and discount rates.
    • The NPV calculation involves discounting all cash flows to the present based on an assumed discount rate.
    • When the discount rate is large, there are larger differences between PV and FV (present and future value) for each cash flow than when the discount rate is small.
    • And it is the discount rate at which the value of the cash inflows equals the value of the cash outflows.
    • Describe the relationship between a project's discount rate and its Net Present Value

  • Advantages of the IRR Method

    • The IRR method is easily understood, it recognizes the time value of money, and compared to the NPV method is an indicator of efficiency.
    • IRR is used in many company financial profiles due its clarity for all parties.
    • The IRR method also uses cash flows and recognizes the time value of money.
    • Compared to payback period method, IRR takes into account the time value of money.
    • This is in contrast with the net present value, which is an indicator of the value or magnitude of an investment.

  • Clustering similarities or distances profiles

    • Network>Roles & Positions>Structural>Profile can perform a variety of kinds of cluster analysis for assessing structural equivalence.
    • One is, what to do with the items in the similarity matrix that index the similarity of an actor to themselves (i.e. the diagonal values)?
    • If you want to include the full profile of both in and out ties for directed data, you need to include the transpose.
    • This algorithm also provides a more polished presentation of the result as a dendogram in a separate window, as shown in Figure 13.14.
    • Profile similarity of geodesic distances of rows and columns of Knoke information network

  • Defining NPV

    • Net Present Value (NPV) is the sum of the present values of the cash inflows and outflows.
    • Since cash flows occur over a period of time, the investor knows that due to the time value of money, each cash flow has a certain value today .
    • The net present value (NPV) is simply the sum of the present values (PVs) and all the outflows and inflows:
    • Also recall that PV is found by the formula $PV=\frac { FV }{ { (1+i) }^{ t } }$ where FV is the future value (size of each cash flow), i is the discount rate, and t is the number of periods between the present and future.
    • There is no difference in value between the value of the money earned and the money invested.

  • Deciding to Refund Bonds

    • The decision of whether to refund a particular debt issue is usually based on a capital budgeting (present value) analysis.
    • The principal benefit, or cash inflow, is the present value of the after-tax interest savings over the life of the issue.
    • Step 1: Calculate the present value of interest savings (cash inflows):
    • Step 2: Calculate the net investment (net cash outflow at time 0).
    • Net present value of refunding = Present value of interest savings - Present value of net investment

  • Calculating the IRR

    • Given a collection of pairs (time, cash flow), a rate of return for which the net present value is zero is an internal rate of return.
    • Given a collection of pairs (time, cash flow) involved in a project, the internal rate of return follows from the net present value as a function of the rate of return.
    • Given the (period, cash flow) pairs (n, Cn) where n is a positive integer, the total number of periods N, and the net present value NPV, the internal rate of return is given by r in:
    • Any fixed time can be used in place of the present (e.g., the end of one interval of an annuity); the value obtained is zero if and only if the NPV is zero.
    • Because the internal rate of return on an investment or project is the "annualized effective compounded return rate" or "rate of return" that makes the net present value of all cash flows (both positive and negative) from a particular investment equal to zero, then the IRR r is given by the formula:

  • MVA and EVA

    • where: MVA is market value added, V is the market value of the firm, including the value of the firm's equity and debt, and K is the capital invested in the firm.
    • EVA is net operating profit after taxes (or NOPAT) less a capital charge, the latter being the product of the cost of capital and the economic capital.
    • where r is the return on investment capital (ROIC); c is the weighted average of cost of capital (WACC); K is the economic capital employed; NOPAT is the net operating profit after tax.
    • The firm's market value added, or MVA, is the discounted sum (present value) of all future expected economic value added: MVA = Present Value of a series of EVA values.
    • MVA is the present value of a series of EVA values.

  • Highlighting parts of the network

    • If we had measured relations with values, rather than simple presence-absence, multiple relations could be combined by addition, subtraction, multiplication, division, averaging, or other methods.
    • NetDraw has some tools that can be of some help.
    • The approach is that of "block modeling. " Rows and columns are moved to try to create "blocks" where all connections within a block are present, and all connections between blocks are absent.
    • NetDraw has useful tools for visualizing and working with ego-networks.
    • The Layout>Egonet command presents a dialog box that lets you select which ego's networks are to be displayed.

  • Foreign Investments

    • We can use the net present value (NPV) to calculate the monetary return to an investment in Equation 26.This equation is almost identical to the present value formula, except the PV0 is negative and located on the right-hand side while we add a new variable, NPV.If the net present value (NPV) equals zero, then this equation reduces to the present value formula.With the NPV formula, we could invest the amount PV0 today that generates the future cash flows, FVi, thatends at Time T.
    • If we calculate a positive, net present value, then our investment is paying off.Consequently, the investment is increasing the investor's wealth because more money flows in than out.Furthermore, investors would use the net present value formula to evaluate several investment projects.Then they select the project with the highest NPV, as long as the NPV is positive.An investor would never choose a project with a negative NPV because the project's return would be negative.Over time, more money flows out than in, creating a net loss.
    • We calculated a net present value of -$82.64 in Equation 27.Unfortunately, you could earn more on the financial securities than your brother's business because the NPV is negative.
    • We calculate the net present value of your investment of $12,358.27 in Equation 29.The NPV is positive, and the investment increases your wealth.However, we must forecast the exchange rates, except today's exchange rate, E0.
    • We calculate the net present value of -$9,764.60 in Equation 30.Our investment became a disaster because we earned a negative return because the euro had depreciated.

  • Defining the Payback Method

    • The payback method is considered a method of analysis with serious limitations and qualifications for its use, because it does not account for the time value of money, risk, financing or other important considerations, such as opportunity cost.
    • While the time value of money can be rectified by applying a weighted average cost of capital discount, it is generally agreed that this tool for investment decisions should not be used in isolation.
    • Alternative measures of "return" preferred by economists are net present value and internal rate of return.
    • Start by calculating net cash flow for each year: net cash flow year one = cash inflow year one - cash outflow year one.
    • Then cumulative cash flow = (net cash flow year one + net cash flow year two + net cash flow year three).