2

Net present value calculation for both perpetuity and for fix period

NPV

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

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

2 answers

  • Upvotes
  • Date ascending
  • Date descending
Best Answer
Book a coaching with Alessandro

100% Recommendation Rate

81 Meetings

909 Q&A Upvotes

USD 159 / Coaching

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.

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.

Book a coaching with Vlad

97% Recommendation Rate

388 Meetings

7,422 Q&A Upvotes

USD 299 / Coaching

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

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

Related BootCamp article(s)

Valuation

Valuation case studies require you to estimate how much a firm, patent, or service is worth. For these cases, use the Discounted Cash Flow method or the Industry multiple method.

Net Present Value - NPV

Use the Net Present Value (NPV) to compare investments with different volatile cash-flows over time and quantitatively assess their attractiveness.

Related case(s)

innogy Case: Smart Meters

Solved 28.6k times
innogy Case: Smart Meters The municipal utility Hamburg Energized is a local energy retail (power and gas) and distribution grid company active in the city of Hamburg. The majority of shares of Hamburg Energized is held by the city itself. As the distribution system operator of Hamburg, Hamburg Energized is responsible for the operations and maintenance of the gas and electricity grid on customer level. In the course of the energy transition in Germany, the responsible board member for the technical grid operations, Jan Bremer, thinks about deploying Smart Meters in the gas and electricity grid. He approaches you with the request to conduct a feasibility analysis and to give a clear recommendation whether or not Hamburg Energized should use Smart Meters in its gas and electricity grid in the future.
4.4 5 625
| Rating: (4.4 / 5.0)

The municipal utility Hamburg Energized is a local energy retail (power and gas) and distribution grid company active in the city of Hamburg. The majority of shares of Hamburg Energized is held by the city itself. As the distribution system operator of Hamburg, Hamburg Energized is responsible for t ... Open whole case

PE Portfolio Strategy

Solved 5.7k times
PE Portfolio Strategy We are a private equity firm operating primarily in the automotive industry. We would like you to figure out whether we should increase our portfolio in the sensor market or not. We would like you to do a profit/margin growth potential analysis and tell us how we can add value to this company given the other companies in our portfolio.
4.1 5 337
| Rating: (4.1 / 5.0)

We are a private equity firm operating primarily in the automotive industry. We would like you to figure out whether we should increase our portfolio in the sensor market or not. We would like you to do a profit/margin growth potential analysis and tell us how we can add value to this company given ... Open whole case