- Project plans
- Project activities
- Legislation and standards
- Industry context
- Specialist wikis
Last edited 27 Nov 2020
Net Present Value
NRM3: Order of cost estimating and cost planning for building maintenance works, defines 'present value' as '...the cost or benefit in the future discounted back to some base date, usually the present day, at a given compound interest rate'.
The term ‘Net Present Value’ (NPV) represents the difference between the present value of cash inflows and the present value of cash outflows for an investment. It is used when considering capital investments to assess profitability.
For an investment to be worthwhile it has to yield a positive NPV, meaning that profit will be generated over time as a result of the investment. A negative NPV indicates that the investment is likely to lose money. Like any other business investment, property development will aim to yield a positive NPV that is greater than would have been achieved if capital was invested elsewhere.
NRM3 suggests that:
|NPV is a standard measure in LCC (life cycle cost) analyses, used to determine and compare the cost effectiveness of proposed solutions. It can be applied across the full range of construction investments, covering whole investment programmes, assets, systems, components and operating and maintenance models.The costs and revenues/benefits to be included in each analysis are defined according to its objectives. For example, revenues from recycling of materials or from surplus energy generation are typically included in LCC analysis of alternative sustainability options.|
The formula for calculating NPV is as follows:
- Ct = net cash inflow during the period ‘t’
- Co = total initial investment costs
- r = discount rate
- t = number of time periods
- End of year 1 = £120,000.
- End of year 2 = £250,000.
- End of year 3 = £550,000.
- End of year 4 = £1.3m.
NPV = £2.22m – £1.7m
NPV = £520,000
Discounting is a way of comparing the value of costs and benefits over different time periods relative to their present values. Money is worth less in the future than it is in the present because of its reduced capacity for generating a return, such as interest, and because of inflation. Discounting is a means of assessing how much less an amount is worth in the future than it is now.
(Y1) £114,285.70 + (Y2) £226,757.37 + (Y3) £475,110.68 + (Y4) £1,069,513.22
NPV = £1,885,666.97
NPV = 1,885,666.97 – £1.7m
NPV = £185,666.97
(Y1) £109,090.91 + (Y2) £206,611.57 + (Y3) £413,223.14 + (Y4) £887,917.49
NPV = £1,616,843.11
NPV = £1,616,843.11 – £1.7m
NPV = -£83,156.89
- Estimated cash flows seldom match those experienced in practice.
- Given the incremental cost of capital required to fund a project, a simple discount rate may not adequately represent the situation.
- Adjustments to take account of risks will only be very rough estimate estimates.
- NPV analysis only considers the circumstances of a specific investment.
The Green Book, Central Government Guidance On Appraisal And Evaluation, Published by HM Treasury in 2020, defines Net Present Value (NPV) as; ‘a generic term for the sum of a stream of future values (that are already in real prices) that have been discounted (in the Green Book by the social time preference rate) to bring them to today’s value.’
It defines Net Present Social Value (NPSV) or Net Present Public Value (NPPV): '...the present value of a stream of future costs and benefits to UK society (that are already in real prices) and that have been discounted over the life of a proposal by the appropriate Green Book social time preference rate.'
 Related articles on Designing Buildings Wiki
- Base year.
- Business plan.
- Capital allowances.
- Capital costs for construction projects.
- Cash flow.
- Compound Annual Growth Rate (CAGR).
- Cost performance index (CPI).
- Cost-benefit analysis in construction.
- Development appraisal.
- Discount rate.
- Discounted cash flow.
- Gross value added (GVA).
- Internal rate of return for property development.
- Net benefits.
- Net savings.
- Life cycle assessment.
- Life Cycle Costing BG67 2016.
- Time value of money.
- Whole life costs.
 External references
Featured articles and news
A commentary from the insurance perspective.
In brief with further links.
A definitive book on a pioneer of green architecture.
Using heritage as a catalyst for reviving historic centres.
Declaration prioritising sustainable urbanisation adopted.
Some brief words about the actuator.
After 34 years at the Institute.
To support the next generation of engineers.
CIAT reporting from the Competition and Markets Authority.
Making sustainable construction number one priority.
Interview with ECA CEO.
Many provisions came into force on June 28, 2022.
With room to expand.
Refurbishment, Energy Efficiency, Indoor air and process.
Why building acoustic considerations must be non-negotiable.
Aluminium Composite Panels (ACP) is one example.
Inventors and innovators at ICE.
Life, death and art at the Stuart court. Book review.
Real estate, place adaptation and innovation.
Review and comment on the revised draft before July 11.
Write about something you know, help us build and grow !
A blended event and triumphant return.
Mark Reynolds succeeds Andy Mitchell as Co-Chair of CLC
Designing Buildings is 10 years old.
From alteration to deconstruction on DB.