Calculating the Net Present Value

The net present value (NPV) is a somewhat complicated formula, but it allows you to predict a project's value more precisely than the lump-sum approach found with the PV formula. NPV evaluates the monies returned on a project for each time period the project lasts. In other words, a project may last five years, but there may be a return on investment (ROI) in each of the five years the project is in existence, not just at the end of the project.

For example, a retail company may be upgrading the facilities at each of their stores to make shopping and purchasing easier for their customers. The company has 1,000 stores. As each store makes the conversion to the new facility design, the project deliverables will begin, hopefully, generating cash flow as a result of the project deliverables. (Uh, we specifically want cash inflow from the new stores, not cash outflow. That's some nerdy accounting humor.) The project can begin earning money when the first store is completed with the conversion to the new facilities. The faster the project can be completed, the sooner the organization will see a complete ROI.

Here's how the NPV formula works:

1. Calculate the project's cash flow for time unit (typically quarters or years).

2. Calculate each time unit total into the present value.

3. Sum the present value of each time unit.

4. Subtract the investment for the project.

5. Take two aspirins.

Chapter 4: Managing Project Integration

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

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