MangoPlantations

What is NPV?

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How to calculate the NPV of a project?

Theory

Net Present Value (NPV) = PV(Income) - PV(Costs) = PV(All cash flows).

The net present value (NPV) of a project or investment is equal to the algebraic sum of the present value of future cash flows.

Imagine a mango plantation (you are farmer economist), you have money ($20,000), and you also plan to sell the plantation in 10 years. You want your money to work, not be consumed by inflation. You have a lot of options for investing, but let's assume (for simplicity) that you can build a second plantation, put money in the bank (at 5%) or do nothing. Discount rate = 3%.

Which cash flows will we get if we build a plantation?(example)

In the first year we will spend all the money, and in the following years we will receive a set amount every year until the 10th year, also at the end we will receive money from the sale of the plantation.

Plantation Price = PV of perpetuity (read in the next release)

What is the net present value (NPV) of these cash flows (money depreciates regardless of whether we invest or not).

To determine the NPV we discount all flows, that is, we divide by (depreciation rate + 1) ^ (the period number).(There is a table for this on the website)

NPV = 47 728$

Which cash flows will we get if we put money in the bank (and interest will be reinvested in the same deposit)?

In the first year we will give the money to the bank, and in the last year we will receive money + interest.

What is the net present value (NPV) of these cash flows (money depreciates regardless of whether we invest or not).

NPV = 24 000$ - 20 000$ = 4 000$

Which cash flows will we get if we do nothing?

No flows => NPV = 0

Which option should we choose?

It is essential to choose a project with a larger NPV. In our example, it is good to choose the construction of a plantation.

Practice

In practice, the main task is to estimate the discount rate and estimate cash flows.

To evaluate the rate, we have data from the Central Bank of the Russian Federation and FED on our website.