The Net Present Value (NPV) of a project is the sum of the all future cash flows discounted to present value. As previously mentioned, the discount rate used is usually, though not always, equal to the WACC. An NPV equal to 0 signifies that the financial benefits of a project are enough to recoup the capital investment. An NPV greater than 0 implies that the project will earn excess returns, which will be distributed to the equity holders. Should the NPV be less than 0, this implies that the financial benefits are not enough to recoup the costs of the project.
Box 3 - 6 below is an excerpt from the cash flow model included in Appendix 1 - Financial Models. The NPV of this 10-year project, assuming a discount rate of 9.56%, is equal to £11,118,969, which means that the project's cash flow will be sufficient to recoup any capital investments. In calculating NPV, this example looks at net cash flow before financing and therefore looks only at the risk of the project and does not consider the impact and cost of debt.
Box 3 - 6 | |||||||
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Period | 0 | 1 | 2 | … | 10 | ||
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Net Cash flow before financing | -£70,500,000 | £10,158,463 | £10,158,463 |
| £16,413,357 | ||
Discount Rate (WACC) | 0% | 9.56% | 9.56% |
| 9.56% | ||
Discounted Value | -£70,500,000 | £9,272,266 | £8,463,378 |
| £6,588,344 | ||
£11,118,969 |
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10, 158, 463 | + | 10, 158, 463 | + | 10, 158, 463 | - | 70,500,000 | |
(1+ .0956)^1 | (1+ .0956)^2 | (1+ .0956)^10 |
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= | 11,118,969 |
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38 See Appendix 3 - Financial Calculations
39 This calculation assumes that NPV is calculated using periods 1 through 10, though only 1, 2, and 10 are shown.