The Case for a Generalized Net Present Value Formula

Conventional NPV formulas suggest that a project's net present value is simply the sum of the present values of its net cash flows. An alternative view sees net present value as the difference between the initial wealth and the present value of the terminal wealth attributable to the project. This “incremental wealth” view requires a generalized formula which provides explicitly for the opportunity costs associated with interim cash flows. This paper discusses the limitations of conventional NPV formulas, the need for a generalized net present value formula, the use of this generalized formula to evaluate financing as well as investment opportunities and the linkage between net present value formulas and rate of return criteria.