NPV (Net Present Value)
Definition
The present value of all future cash flows from an investment minus the initial cost. NPV > 0 means the investment creates value.
Why is NPV (Net Present Value) Important?
NPV (Net Present Value) is a critical concept in corporate finance, business analysis, and investment decision-making. Whether you are evaluating a company's performance, assessing an investment opportunity, or running your own business, understanding this metric helps you make data-driven decisions that maximize returns and minimize risk.
Our business calculators provide instant computations for this metric, empowering entrepreneurs, analysts, and investors to evaluate financial health and make strategic decisions with confidence.
What is NPV (Net Present Value)?
Net Present Value (NPV) is the difference between the present value of future cash inflows and the present value of cash outflows. It determines whether an investment will generate more value than it costs, accounting for the time value of money.
NPV Formula
NPV = ฮฃ [Cash Flow_t / (1+r)^t] โ Initial Investment
Where r = discount rate, t = time period
Decision Rule
| NPV Result | Decision | Meaning |
|---|---|---|
| NPV > 0 | Accept โ | Investment creates value |
| NPV = 0 | Indifferent | Earns exactly the required rate of return |
| NPV < 0 | Reject โ | Investment destroys value |
Example
Invest $100,000 today. Returns $35,000/year for 4 years. Discount rate = 10%.
| Year | Cash Flow | Discount Factor | Present Value |
|---|---|---|---|
| 0 | -$100,000 | 1.000 | -$100,000 |
| 1 | $35,000 | 0.909 | $31,818 |
| 2 | $35,000 | 0.826 | $28,926 |
| 3 | $35,000 | 0.751 | $26,296 |
| 4 | $35,000 | 0.683 | $23,905 |
| NPV | $10,945 | ||