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Present Value versus Net Present Value
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YearCash FlowsPVMDiscounted Cash FlowsMarket Price of Stock = $22, 12% Required Rate of Return
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2022 $ 2.00 0.893 $ 1.79 $2.00 dividend in year #1
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2023 2.20 0.797 1.75 $2.20 dividend in year #2
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2024 2.30 0.712 1.64 $2.30 dividend in year #3
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2025 29.30 0.636 18.62 $2.30 dividend in year #4 and $27 value of stock at end of year #4
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 $ 23.80 Present Value = sum of (discounted cash inflows)
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Required Rate of Return:
12.00%
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YearCash Flows
Purchase stock for $22 at beginning of year
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2022 $ 2.00
$2.00 dividend in year #1
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2023 2.20
$2.00 dividend in year #1
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2024 2.30
$2.00 dividend in year #1
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2025 $ 29.30
$2.30 dividend in year #4 and $27 value of stock at end of year #4
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$23.80
Present Value using NPV function =NPV(required_rate_of_return,cash inflows)
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Net Present Value = Sum of discounted cash inflows and outflows!
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YearCash Flows
Cash outflows are negative values -- cash inflows are positive values
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 $ (22.00)
Purchase stock for $22 at beginning of year
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2022 2.00
$2.00 dividend in year #1
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2023 2.20
$2.00 dividend in year #1
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2024 2.30
$2.00 dividend in year #1
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2025 $ 29.30
$2.30 dividend in year #4 and $27 value of stock at end of year #4
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$1.6047
Net Present Value =NPV(required_rate_of_return,cash inflows and outflows)
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Net Present Value = Present Value of Future Cash Flows - Initial Investment
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Net Present Value14.00%Required Rate of Return
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YearCash FlowsPVMDiscounted Cash FlowsMarket Price of Stock = $22
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 $ (22.00)1.000 $ (22.00)$22.00 initial purchase of stock (cash outflow)
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2022 2.00 0.877 1.75 $2.00 dividend in year #1
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2023 2.20 0.769 1.69 $2.00 dividend in year #1
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2024 2.30 0.675 1.55 $2.00 dividend in year #1
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2025 29.30 0.592 17.35 $2.30 dividend in year #4 and $27 value of stock at end of year #4
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 $ 0.35 Net Present Value = sum of (all discounted cash flows)
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