The net present value (or benefit) is a cost-benefit calculation that uses monetary benefit, cost and the interest rate to generate a total value for a project lasting several years.
For a project lasting n years:
net present value (or net benefit) =
= SUM <from year 1 to n> (((benefits in money in year t) – (cost in money in year t)) / ((1 + (interest rate as decimal fraction))^ (t – 1)))
where:
• The benefits, cost and interest rate should be adjusted each year, although for simplification examples may keep these constant.
If the cost is greater than the benefit (negative net present value), then the calculation can be termed a net cost.
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