# How to calculate net present value in business plan

Any business planning implies accepting business risks. These risks predominantly derive from the inability to predict the economy and the behavior of people or markets. The economists deal with the calculation of possible losses for a given period when it comes to measuring risks.

## Determining the net present value: the calculation of risks

That’s why a need to quantify the risks emerges. In this case, analysts will know in advance, long before the investment is made, which investments can generate additional funds in the future and which can’t.
A set of indicators is used to choose a particular investment project. The most widespread are the methods allowing assess the impact of time on the funds (usually, it is the depreciation of funds). However, this effect can be revealed in a variety of ways in different economies.

## How to calculate net present value in a business plan

One of the most commonly used indicators to assess an investment project is the net present value that is calculated according to the following formula: where

ICF – input cash flows during a certain period;
OSF – output cash flows covered during a certain period;
I – volume of investments made for a certain period. At the same time, the real cash flow is used for the calculations and not the figures of financial performance.
t – number of periods for which the cash flows are investigated;
r – discount rate.

Let’s consider the calculation of the net present value in an Excel sample of a business plan. Calculation of the net present value allows evaluate an investment project by means of discounting. Discounting is the conversion of future money into its present value. The rate used as a coefficient of money value reduction is chosen depending on the economy development, the investment climate and the availability of credits.

The project should be considered when the NPV indicator is positive.

Approaches to the analysis of the net present value in business planning are as follows:

1) Cash flows are re-calculated taking into account the risk factor (discount rate);
2) Cash flows are discounted considering the risk and then without it.
The first approach is used when it is necessary to adjust the risk premium according to the interest rate. That is, if the discount rate is high, then a risk rate should be high too.