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Answer Posted / karthik k
NAV stands for Net Asset Value which indicates the unit
price of a stock or fund.
NAV of a fund = (asset + income - liabilites - expenses)/
(no of units outstanding)
Asset = Market value of investments+receivables + Accrued
income + other asset(i.e. income due but not received)
Liabilites=accrued expenses + payables + other liabilites.
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NPV stands for Net Present Value. which is defined as the
total present value (PV) of a time series of cash flows. It
is a standard method for using the time value of money to
appraise long-term projects. Used for capital budgeting,
and widely throughout economics, it measures the excess or
shortfall of cash flows, in present value terms, once
financing charges are met.
Therefore NPV is the sum of all terms , the formula is,
R suffix t divided by (1+i)power t
where
t - the time of the cash flow
i - the discount rate (the rate of return that could be
earned on an investment in the financial markets with
similar risk.)
Rt - the net cash flow (the amount of cash, inflow minus
outflow) at time t (for educational purposes, C0 is
commonly placed to the left of the sum to emphasize its
role as investment).
if NPV > 0 the investment would add value to the firm.
the project may be accepted.
if NPV < 0 the investment would subtract value from the
firm.
the project should be rejected.
if NPV = 0 the investment would neither gain nor lose value
for the firm.
We should be indifferent in the decision whether to accept
or reject the project. This project adds no monetary value.
Decision should be based on other criteria, e.g. strategic
positioning or other factors not explicitly included in the
calculation.
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