Is it worth more than it costs?
Discount each year's cash flow back to today and add them up. A positive net present value means the investment earns more than the return you require; the internal rate of return is the rate at which it just breaks even.
Net present value (NPV)
SAR 413.22
Positive: at 10.00% the investment earns more than it costs.
Internal rate of return (IRR)
13.07%
- Cash flow
- Present value
| Year | Cash flow | Discount factor | Present value |
|---|---|---|---|
| Today | −10,000.00 | 1 | −10,000.00 |
| Year 1 | 6,000.00 | 0.9091 | 5,454.55 |
| Year 2 | 6,000.00 | 0.8264 | 4,958.68 |
| Total (NPV) | 413.22 | ||
How it works
The same sum with your numbers, step by step.
Discount each cash flow to today
t=0: −10,000.00 t=1: 6,000.00 ÷ 1.1¹ = 5,454.55 t=2: 6,000.00 ÷ 1.1² = 4,958.68
Add the present values
−10,000.00 + 5,454.55 + 4,958.68 = SAR 413.22
IRR: the rate where the NPV is zero, found by narrowing down
IRR = 13.0662% −10,000.00 + 6,000.00 ÷ 1.130662¹ + 6,000.00 ÷ 1.130662² = 0.00
Where this appears in the CME
Net present value and the internal rate of return are in CME-4A, chapter 5 (Economics and investment analysis). The numbers filled in here are a practice question: pay USD 10,000 today and receive USD 6,000 a year for two years, at 10% a year.
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