Expected net present value (ENPV) has to do with the balance between the influx and outgo of cash that is anticipated to occur during an upcoming period. The idea is to project the net present value that will occur during that upcoming period and make adjustments in the business operation accordingly. Doing so makes it easier to predict the net assets that will be in place to help the business remain financially viable in the future.
The basis for ENPV is the calculation of not only the disbursements and receipts of revenue during the period under consideration, but also what type of changes may occur in the value of that cash between today and that future period. This means allowing for the possibility of inflation or some other economic situation to either cause the currency related to that cash flow and outgo to change in some manner. By taking this into account and accurately projecting not only the amount of cash but also the anticipated value of that cash, it is possible to determine if any changes need to be made to the business operation in order to compensate for or make best use of those shifts.
Taking the time to project the expected net present value associated with a specific project is a great way to determine if the project should be pursued. By taking into account the projections of costs associated with sustaining the project and balancing that against the revenue that the project is expected to generate within the specified time period, business owners can determine if the effort is something that needs to be pursued or if the project should be abandoned in favor of some other project. By taking into account the possible devaluation of the cash based on what is happening within the economy, businesses owners can further refine the process and have a better idea of what to expect in the way of real returns from the effort.
Calculating the expected net present value can aid in projecting the benefits or losses from just about any type of business activity. Whether launching a new product, building a new facility, or even engaging in the acquisition of another business entity, this approach can provide valuable insight into how quickly returns will offset expenses, and the project can be expected to become profitable. By taking into account the results of determining the expected net present value, it is possible to avoid situations that may appear worthy of investment at first glance, but in fact may not be particularly profitable when all relevant factors are taken into consideration.
