Definition of net present value method

net present value method

a process that uses the discounted
cash flows of a project to determine whether the
rate of return on that project is equal to, higher than, or
lower than the desired rate of return

Net Present Value (NPV) Method

A method of ranking investment proposals. NPV is equal to the present value of the future returns, discounted at the marginal cost of capital, minus the present value of the cost of the investment.

NPV (net present value of cash flows)

Same as PV, but usually includes a subtraction for an initial cash outlay.

PV (present value of cash flows)

the value in today’s dollars of cash flows that occur in different time periods.
present value factor equal to the formula 1/(1 - r)n, where n is the number of years from the valuation date to the cash flow and r is the discount rate.
For business valuation, n should usually be midyear, i.e., n = 0.5, 1.5, . . .

Adjusted present value (APV)

The net present value analysis of an asset if financed solely by equity
(present value of un-levered cash flows), plus the present value of any financing decisions (levered cash
flows). In other words, the various tax shields provided by the deductibility of interest and the benefits of
other investment tax credits are calculated separately. This analysis is often used for highly leveraged
transactions such as a leverage buy-out.

Bond value

With respect to convertible bonds, the value the security would have if it were not convertible
apart from the conversion option.

Book value

A company's book value is its total assets minus intangible assets and liabilities, such as debt. A
company's book value might be more or less than its market value.

Book value per share

The ratio of stockholder equity to the average number of common shares. Book value
per share should not be thought of as an indicator of economic worth, since it reflects accounting valuation
(and not necessarily market valuation).

Capitalization method

A method of constructing a replicating portfolio in which the manager purchases a
number of the largest-capitalized names in the index stock in proportion to their capitalization.

Carrying value

Book value.

Cash-surrender value

An amount the insurance company will pay if the policyholder ends a whole life
insurance policy.

Committee, AIMR Performance Presentation Standards Implementation Committee

The Association for Investment Management and Research (AIMR)'s Performance presentation Standards Implementation
Committee is charged with the responsibility to interpret, revise and update the AIMR Performance
presentation Standards (AIMR-PPS(TM)) for portfolio performance presentations.

Conversion value

Also called parity value, the value of a convertible security if it is converted immediately.

Current rate method

Under this currency translation method, all foreign currency balance-sheet and income
statement items are translated at the current exchange rate.

Direct estimate method

A method of cash budgeting based on detailed estimates of cash receipts and cash
disbursements category by category.

European Monetary System (EMS)

An exchange arrangement formed in 1979 that involves the currencies
of European Union member countries.

Exercise value

The amount of advantage over a current market transaction provided by an in-the-money
option.

Expected value

The weighted average of a probability distribution.

Expected value of perfect information

The expected value if the future uncertain outcomes could be known
minus the expected value with no additional information.

Exposure netting

Offsetting exposures in one currency with exposures in the same or another currency,
where exchange rates are expected to move in such a way that losses or gains on the first exposed position
should be offset by gains or losses on the second currency exposure.

Extraordinary positive value

A positive net present value.

Face value

See: Par value.

Firm's net value of debt

Total firm value minus total firm debt.

Flow-through method

The practice of reporting to shareholders using straight-line depreciation and
accelerated depreciation for tax purposes and "flowing through" the lower income taxes actually paid to the
financial statement prepared for shareholders.

Future value

The amount of cash at a specified date in the future that is equivalent in value to a specified
sum today.

International Monetary Fund

An organization founded in 1944 to oversee exchange arrangements of
member countries and to lend foreign currency reserves to members with short-term balance of payment
problems.

International Monetary Market (IMM)

A division of the CME established in 1972 for trading financial
futures. Related: Chicago Mercantile Exchange (CME).

Intrinsic value of an option

The amount by which an option is in-the-money. An option which is not in-themoney
has no intrinsic value. Related: in-the-money.

Intrinsic value of a firm

The present value of a firm's expected future net cash flows discounted by the
required rate of return.

Investment value

Related:straight value.

Liquidation value

net amount that could be realized by selling the assets of a firm after paying the debt.

Loan value

The amount a policyholder may borrow against a whole life insurance policy at the interest rate
specified in the policy.

Log-linear least-squares method

A statistical technique for fitting a curve to a set of data points. One of the
variables is transformed by taking its logarithm, and then a straight line is fitted to the transformed set of data
points.

Market value

1) The price at which a security is trading and could presumably be purchased or sold.
2) The value investors believe a firm is worth; calculated by multiplying the number of shares outstanding by the
current market price of a firm's shares.

Market value ratios

Ratios that relate the market price of the firm's common stock to selected financial
statement items.

Market value-weighted index

An index of a group of securities computed by calculating a weighted average
of the returns on each security in the index, with the weights proportional to outstanding market value.

Maturity value

Related: par value.

Monetary gold

Gold held by governmental authorities as a financial asset.

Monetary policy

Actions taken by the Board of Governors of the Federal Reserve System to influence the
money supply or interest rates.

Monetary / non-monetary method

Under this translation method, monetary items (e.g. cash, accounts
payable and receivable, and long-term debt) are translated at the current rate while non-monetary items (e.g.
inventory, fixed assets, and long-term investments) are translated at historical rates.

Net adjusted present value

The adjusted present value minus the initial cost of an investment.

Net advantage of refunding

The net present value of the savings from a refunding.

Net advantage to leasing

The net present value of entering into a lease financing arrangement rather than
borrowing the necessary funds and buying the asset.

Net advantage to merging

The difference in total post- and pre-merger market value minus the cost of the merger.

Net asset value (NAV)

The value of a fund's investments. For a mutual fund, the net asset value per share
usually represents the fund's market price, subject to a possible sales or redemption charge. For a closed end
fund, the market price may vary significantly from the net asset value.

Net assets

The difference between total assets on the one hand and current liabilities and noncapitalized longterm
liabilities on the other hand.

Net benefit to leverage factor

A linear approximation of a factor, T*, that enables one to operationalize the
total impact of leverage on firm value in the capital market imperfections view of capital structure.

Net book value

The current book value of an asset or liability; that is, its original book value net of any
accounting adjustments such as depreciation.

Net cash balance

Beginning cash balance plus cash receipts minus cash disbursements.

Net change

This is the difference between a day's last trade and the previous day's last trade.

Net errors and omissions

In balance of payments accounting, net errors and omissions record the statistical
discrepancies that arise in gathering balance of payments data.

Net financing cost

Also called the cost of carry or, simply, carry, the difference between the cost of financing
the purchase of an asset and the asset's cash yield. Positive carry means that the yield earned is greater than
the financing cost; negative carry means that the financing cost exceeds the yield earned.

Net float

Sum of disbursement float and collection float.

Net income

The company's total earnings, reflecting revenues adjusted for costs of doing business,
depreciation, interest, taxes and other expenses.

Net investment

Gross, or total, investment minus depreciation.

Net lease

A lease arrangement under which the lessee is responsible for all property taxes, maintenance
expenses, insurance, and other costs associated with keeping the asset in good working condition.

Net operating losses

Losses that a firm can take advantage of to reduce taxes.

Net operating margin

The ratio of net operating income to net sales.

Net period

The period of time between the end of the discount period and the date payment is due.

Net present value (NPV)

The present value of the expected future cash flows minus the cost.

Net present value of growth opportunities

A model valuing a firm in which net present value of new
investment opportunities is explicitly examined.

Net present value of future investments

The present value of the total sum of NPVs expected to result from
all of the firm's future investments.

Net present value rule

An investment is worth making if it has a positive NPV. Projects with negative NPVs
should be rejected.

Net profit margin

net income divided by sales; the amount of each sales dollar left over after all expenses
have been paid.

Net salvage value

The after-tax net cash flow for terminating the project.

Net working capital

Current assets minus current liabilities. Often simply referred to as working capital.

Net worth

Common stockholders' equity which consists of common stock, surplus, and retained earnings.

Netting

Reducing transfers of funds between subsidiaries or separate companies to a net amount.

Netting out

To get or bring in as a net; to clear as profit.

Normalizing method

The practice of making a charge in the income account equivalent to the tax savings
realized through the use of different depreciation methods for shareholder and income tax purposes, thus
washing out the benefits of the tax savings reported as final net income to shareholders.

Original face value

The principal amount of the mortgage as of its issue date.

Par value

Also called the maturity value or face value, the amount that the issuer agrees to pay at the maturity date.

Parity value

Related:conversion value

Payments netting

Reducing fund transfers between affiliates to only a netted amount. netting can be done on
a bilateral basis (between pairs of affiliates), or on a multi-lateral basis (taking all affiliates together).

Present value

The amount of cash today that is equivalent in value to a payment, or to a stream of payments,
to be received in the future.

Present value factor

Factor used to calculate an estimate of the present value of an amount to be received in
a future period.

Present value of growth opportunities (NPV)

net present value of investments the firm is expected to make
in the future.

Price value of a basis point (PVBP)

Also called the dollar value of a basis point, a measure of the change in
the price of the bond if the required yield changes by one basis point.

Purchase method

Accounting for an acquisition using market value for the consolidation of the two entities'
net assets on the balance sheet. Generally, depreciation/amortization will increase for this method compared
with pooling and will result in lower net income.

Registered representative

A person registered with the CFTC who is employed by, and soliciting business
for, a commission house or futures commission merchant.

Relative value

The attractiveness measured in terms of risk, liquidity, and return of one instrument relative to
another, or for a given instrument, of one maturity relative to another.

Replacement value

Current cost of replacing the firm's assets.

Residual method

A method of allocating the purchase price for the acquisition of another firm among the
acquired assets.

Residual value

Usually refers to the value of a lessor's property at the time the lease expires.

Safety-net return

The minimum available return that will trigger an immunization strategy in a contingent
immunization strategy.

Salvage value

Scrap value of plant and equipment.

SIMEX (Singapore International Monetary Exchange)

A leading futures and options exchange in Singapore.

Simple compound growth method

A method of calculating the growth rate by relating the terminal value to
the initial value and assuming a constant percentage annual rate of growth between these two values.

Standardized value

Also called the normal deviate, the distance of one data point from the mean, divided by
the standard deviation of the distribution.

Statement-of-cash-flows method

A method of cash budgeting that is organized along the lines of the statement of cash flows.

Straight value

Also called investment value, the value of a convertible security without the con-version option.

Temporal method

Under this currency translation method, the choice of exchange rate depends on the
underlying method of valuation. Assets and liabilities valued at historical cost (market cost) are translated at
the historical (current market) rate.

Terminal value

The value of a bond at maturity, typically its par value, or the value of an asset (or an entire
firm) on some specified future valuation date.

Time value of an option

The portion of an option's premium that is based on the amount of time remaining
until the expiration date of the option contract, and that the underlying components that determine the value of
the option may change during that time. Time value is generally equal to the difference between the premium
and the intrinsic value. Related: in-the-money.

Time value of money

The idea that a dollar today is worth more than a dollar in the future, because the dollar
received today can earn interest up until the time the future dollar is received.

Utility value

The welfare a given investor assigns to an investment with a particular return and risk.

Value-added tax

method of indirect taxation whereby a tax is levied at each stage of production on the value
added at that specific stage.

Value-at-Risk model (VAR)

Procedure for estimating the probability of portfolio losses exceeding some
specified proportion based on a statistical analysis of historical market price trends, correlations, and volatilities.

Value additivity principal

Prevails when the value of a whole group of assets exactly equals the sum of the
values of the individual assets that make up the group of assets. Stated differently, the principle that the net
present value of a set of independent projects is just the sum of the net present values of the individual projects.

Value date

In the market for Eurodollar deposits and foreign exchange, value date refers to the delivery date
of funds traded. Normally it is on spot transactions two days after a transaction is agreed upon and the future
date in the case of a forward foreign exchange trade.

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