14 November 2022

PV Vs NPV | Difference | Comparison

PV stands for present value, while NPV stands for net present value. Present value(PV) refers to the present value of all future cash inflows in the company during a specific period of time. In contrast, Net present value(NPV), is the value obtained by deducting the present value of all the company's cash outflows from the present value of the total cash inflows. But first, what exactly do PV and NPV doIn this article, we'll compare and discuss the key differences between the two methods PV Vs NPV. 

What is PV?

The total of all future cash flow discounted at a particular rate of return is known as the present value(PV). The fair value of future revenues or liabilities can be calculated using present value, sometimes referred to as discounted value. A key idea in finance is the calculation of present value, which is also utilized to determine a company's valuation. Additionally, the value of annuities, spot rates, bond prices, and the computation of personal obligations all depend on this concept. 

What is NPV?

Net present value(NPV) is the result of discounting all of the cash inflows and outflows and then combining all of their present values. This means that the original(often the investment made at the present time) is a deduction from the other present values. 

PV Vs NPV | Difference between PV and NPV:

  • PV is known as Present value and NPV is known as Net present value.
  • Present value is the addition of all the future cash inflows given at a particular rate. The difference between the cash flows generated over time and the initial investment needed to finance is known as the net present value.
  • Present values do not help in calculating wealth creation or profitability. Net present value helps in calculating profitability.
  • Present value only accounts for cash flow, while Net present value accounts for the initial investment required to calculate the net figure. 
  • Understanding the idea of present value is crucial, but the idea of net present value is more extensive and difficult. 
  • The future cash flow is simply discounted by the necessary rate of return over the necessary time period to arrive at the present value. Net present value is more complex and takes into account cash flows at different periods. 
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