Now that we have a tool for translating future costs back to present worth, we can also create present value estimations for future revenue streams as well. For example, a utility-scale PV system will generate power which utility companies can sell for revenue for 25-30 years. The cash coming into the company in 20 years can be brought back to the present worth, using the same formula as before.
What’s more, is each of those future revenues (years 1-30) must be brought back to the present using their own separate present worth formulas. When all of these revenues are brought to present value, and added up, we call that Net Present Value (NPV).
Below is a “cash flow diagram” that helps explain future revenue streams. The arrows which point up indicate a revenue, and the arrows which point down indicate a future cost. The relative sizes of the arrows represent the relative values of the revenue. We will consider the aforementioned case of the power-plant and the future inverters.
(Assume each upward arrow is worth $7,000,000, and corresponds with another year passing)
If one were to bring each arrow’s worth back to present value using the present value, you get a “Net Present Value” for the power-plant. Recall that the equation for the present value of the inverters ($4M cost in year 7) is shown above, and we got $3.3M. When we repeat the same formula (replacing n for the appropriate amount of years, and C0 for the appropriate future cost) for all 28 values, and sum them all up (keeping costs as a negative, and revenues as a positive) we will get the “net present value”. In this case, the net present value is $21,493,308. Programs like Microsoft Excel have a built in function for this type of problem that can be used to verify this number.