Question

What does it mean when the NPV of payments made on a loan is less then the loan amount itself?

Answer 1

when the NPV of payments made on a loan is less then the loan amount itself it means that its situation of loss why i explain as follow.

Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.

The following formula is used to calculate NPV:

Net Present Value Formula.

In this equation:

R_t = net cash inflow-outflows during a single period t

i = discount rate or return that could be earned in alternative investments

t = number of time periods

If you are unfamiliar with summation notation – here is an easier way to remember the concept of NPV:

NPV = (Today’s value of the expected cash flows) – (Today’s value of invested cash)

A positive net present value indicates that the projected earnings generated by a project or investment - in present dollars - exceeds the anticipated costs, also in present dollars. It is assumed that an investment with a positive NPV will be profitable, and an investment with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that only investments with positive NPV values should be considered.