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PMP Certification Formulas: Net Present Value

9 Nov, 2017 —Stefania Galatolo (updated 1 Jan, 2018)

Project Selection Formulas

Future Value

Present Value

Net Present Value

Payback Period

Benefit Cost Ratio (BCR)

Return on Capital (ROC)

Economic Value Add Benefit Measurement (EVA)

Opportunity Cost

Working Capital

Return on Investment (ROI)

Discounted Cash Flow (DCF)

Depreciation

Expected Monetary Value (EMV)

Net Present Value

$Net Present Value$ or $NPV$ is the difference between the present value of cash inflows and the present value of cash outflows. It is the potential change in an investor’s wealth caused by that project while time value of money is being accounted for.

Formula

\begin{equation} NPV=\displaystyle\sum_{t=1}^{T} \frac{FV_t}{(1+r)^t} – C_0 \end{equation}

Where:

$NPV$=Net Present Value

$FV$=Future Value of cash inflows, at time t

$C_0$=initial investment

$r$=interest rate

$T$=cash flow period

Explanation

The NPV decision rules: $NPV>0$, accept project; $NPV=0$ accept or reject project; $NPV<0$ reject project.
For the PMP® exam, you will not likely have to calculate NPV. You just need to know that the project with the highest NPV provides the more favorable financial investment.

Source: Project Management Institute (2017). A Guide to the Project Management Body of Knowledge (PMBOK® Guide). 6th ed. Newtown Square: Project Management Institute.

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