Nettonykyarvon

Nettonykyarvon, in Finnish finance terminology, refers to the net present value (NPV) of a project or investment. It represents the current value of expected future cash inflows minus the current value of cash outflows, discounted at a rate that reflects the cost of capital and project risk. NPV is a central tool in capital budgeting and investment decision making, used to assess whether a project adds value to an organization.

The standard calculation is NPV = sum from t = 1 to n of CF_t / (1 + r)^t minus I_0, where CF_t are the net cash inflows in year t, r is the discount rate, n is the project horizon, and I_0 is the initial investment. Some presentations place I_0 as a negative cash flow at t = 0. A positive NPV indicates the project is expected to generate value above the chosen hurdle rate, while a negative NPV suggests the opposite. The discount rate r typically reflects the cost of capital and project risk.

Example: if an initial outlay of 1,000 is followed by cash inflows of 300 per year for four years and the discount rate is 8%, the NPV is approximately −7, implying the project would not meet the required return.

Limitations include sensitivity to input estimates for cash flows and the discount rate, the assumption of reinvestment at rate r, and the potential to overlook non-financial factors. NPV is often used alongside other metrics such as the internal rate of return, profitability index, and payback period to inform investment choices. Real versus nominal values and tax considerations may also modify the calculation in practice.