Net Present Value (NPV) and Present Value (PV)

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last updated: 4th August 2011

Present value (PV) is the capitalised value of a stream of future costs or benefits. It enables the cost and revenue streams of different options to be put on to a comparable footing by expressing them in terms of their present value.  For example, having an income of £1000 per year for 4 years is the same as having £3802 now because if you invested the £3802 now at 3½% interest over the 4 years you would receive £4000.  This is because as time passes, in real terms, each £1 becomes worth less.

Net present value (NPV) describes the net value of a stream of costs and a stream of benefits ie the balancing value when the present value of the costs are subtracted from the present value of the benefits.

Calculations are based on a discount factor (currently set at 3½%) which is considered to represent the amount of worth each £1 reduces over a year.  HM Treasury publishes the discount rate - see the WLC Model supporting material for more information.
 

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