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NPV

Net present value calculation for both perpetuity and for fix period

Someone asked on Nov 08, 2018 - 2 answers

Hi,

What are the formulas for npv for perpetuity and fixed period? I am seeing all sorts of formulas online and cannot tell which is what I need

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Alessandro
Expert
replied on Nov 08, 2018
Bain & Company | University of Cambridge | CV/Resume writing | 770 GMAT

Hey there,

If you don't have an MBA, the likelihood of having to use the formula in an interview (at least for MBB) is close to zero. If you did, you'd probably just to have to discount a couple cash flows in the future (i.e. a manual DCF) rather than just calculating the NPV using the NPV formula. If you are applying to different firms, you should check, but again I would be surprised.

Anyways, to answer your question - for a fix period you would just discount each cash flow year by year, see below:

NPV formula

In perpetuity, you just divide the cash flow by the (discount rate - the growth in the cash flow):

PV of growing perpetuity formula

Note that if there is no growth in cash flow, then g=0, and the formula is D/r.

Vlad replied on Nov 08, 2018
McKinsey / Accenture / Got all BIG3 offers / More than 300 real MBB cases / Harvard Business School

Hi,

Check this presentation:

https://web.iit.edu/sites/web/files/departments/academic-affairs/academic-resource-center/pdfs/NPV_calculation.pdf

I believe you need to understand the concept rather than just apply the formulas. So google can help you here.

Best

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