NPV Calculation

This article explains how net present value (NPV) is calculated in Model Reef.

You will learn:

• How NPV is computed from FCFF or FCFE.

• How discount rates and terminal value are applied.

• How NPV differs for enterprise and equity valuations.

NPV converts a stream of future cashflows into a single value today.

1

NPV from cashflow series

For a given scenario, the valuation engine constructs a series of cashflows:

• Either FCFF or FCFE for each forecast period.

• Plus a terminal value allocated to the final period.

It then applies discount factors derived from:

• WACC for FCFF based valuations.

• Equity discount rate for FCFE based valuations.

• The model's timing structure (dates or periods).

The general NPV formula is:

NPV
= Sum over all periods of (Cashflow in period ÷ (1 + discount rate) ^ t)

Where t is the number of periods or fractional years from the valuation date.

2

Enterprise NPV versus equity NPV

Model Reef distinguishes between:

• Enterprise NPV

  • Based on FCFF.

  • Represents value to all capital providers.

  • To derive equity value you typically adjust for net debt.

• Equity NPV

  • Based on FCFE.

  • Represents value directly attributable to equity holders.

  • Net debt is already accounted for in the FCFE cashflows.

You can review both types for cross checking and communication purposes.

3

Periodicity and exact discounting

The engine handles different period structures by:

• Converting annual discount rates into effective per period rates where needed.

• Using actual dates or period indices to calculate t.

• Supporting irregular periods if the model structure implies them.

This keeps NPV calculations aligned with how your model handles time.

4

Sensitivity of NPV

NPV is sensitive to:

• Changes in discount rates.

• Changes in growth, margins and capex assumptions that affect FCFF or FCFE.

• Terminal value choices, especially the multiple or growth rate.

Model Reef makes it easy to explore these sensitivities by:

• Creating alternate scenarios with different assumptions.

• Comparing NPVs across scenarios on dashboards and reports.

Related articles

• WIP & Cost-to-Complete Forecasting

• Build an Acquisition Case vs Base Case

• Model Templates

• Export Options