Wealth Opportunities in Commercial Real Estate: Management, Financing, and Marketing of Investment Properties

Net Present Value (NPV)

Net present value (NPV) reflects how well the investment performed in relation to one's target return. After the cash flow is discounted at the given discount rate, the initial investment plus the discounted value of any additional equity infusion is backed out. In other words, discount the cash inflow and compare this figure to the discounted value of the cash outflows. If the result is positive, your target yield has been exceeded; if it is negative, the target yield has not been achieved.

The net present value is calculated as follows:

Net Present Value = Present Value of the Project's Cash Flow −the Initial Investment + the Present Value ofAny Additional Capital Contribution

Applying the net present value concept to the hypothetical example, if the discount rate is 8.31 percent, there is a positive NPV. The present value of the cash inflow, equal to approximately $14 million less the initial investment of $3,625,000, is a positive number. The conclusion is, therefore, that Steven Stable will earn more than the 8.31 percent discount rate.