If you own a startup, you may have come across net present value (NPV) when discussing raising capital with investors. NPV is a tool investors use to evaluate the profitability of a given investment. You can also use NPV to gauge potential projects your startup will deploy its capital towards. This article will explain the concepts behind NPV and how it is used in practice so you can understand its relevance for your startup. <\/p>\n\n\n\n
NPV is a tool used to account for the time value of money. Behind NPV is the idea that money in the future is worth less than it is now. <\/p>\n\n\n\n
To illustrate this principle, ask yourself if your startup<\/a> would loan another business money for free. Outside of an act of generosity, your answer is probably not. You would not loan \u00a3100 for a year only to be paid \u00a3100 in a year\u2019s time. Instead, you would expect to receive interest payments throughout the loan or upon repayment of the principal amount. At 10% interest, this would be \u00a310. <\/p>\n\n\n\n Put another way, we might say that obtaining \u00a3110 in a year is worth \u00a3100 now. \u00a3100 is the present value of \u00a3100 in a year. <\/p>\n\n\n\n NPV is relevant in investments because significant capital investments usually have the investors deploy a large capital sum upfront. Investors subsequently expect the investment project to generate a stream of cash flows directed towards them. <\/p>\n\n\n\n In many cases, investors will seek to exit their investment at the end of a specified period. If the investor obtains more at the end of their investment when they exit, they make capital gains. This happens when an early equity investor sells their stake following an initial public offering<\/a>. <\/p>\n\n\n\n However, many investment projects do not give investors a return on capital investment. Sometimes, they may not receive any of their cash back at the end of the investment period. In these cases, the goal of the investment is to generate a sufficient stream of cash flows over the investment period that makes it a competitive investment.\u00a0<\/p>\n\n\n\n This is often the case for a startup\u2019s management looking to acquire a valuable asset to be used in their operations but which will steadily lose value throughout its productive life. A typical example is a piece of equipment.<\/p>\n<\/div>\n\n\n\n In all cases, investors or your startup\u2019s management need a way to determine the investment’s current value. This is because they need to know if it is worth it to lock up their money right now to obtain the benefit of the investment in the future. <\/p>\n\n\n\n\n\n Continue reading this article below the form\n <\/i>\n<\/a>\nInvestment Characteristics <\/h2>\n\n\n\n