Describe the factors that are used in the NPV and the FV formulas. Give an example of how to use the formulas for NPV and FV for a stock purchase.

To determine an investment’s viability, the Net Present Value formula (NPV), and the Future Value formula (FV), take into consideration the time value. The two equations have similar inputs, such as initial investment, future cash flow, and discount rate, but they produce different results.

A positive NPV number, for example, indicates an investment that will produce returns over its cost. However a negative NPV value implies the opposite. In contrast, the FV formula shows the value of a sum at a future date assuming that all cash flow is received and invested.

Imagine that you would like to purchase 100 stocks for $10 with $1 annual dividends per share. If you use these figures and a 10% discounted rate, your NPV is $57.60. This indicates that the investment will likely be worthwhile. Your FV in five years’ time would be $161.00.