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NPV

   Also found in: Dictionary/thesaurus, Acronyms, Encyclopedia, Wikipedia, Hutchinson 0.03 sec.
NPV

Net Present Value
A measure of discounted cash inflow to present cash outflow to determine whether a prospective investment will be profitable. For example, if a dentist wishes to purchase a new dental practice, he may calculate the net present value over a number of years to see if he will recover his investment in a reasonable period of time. If the ask price for the dental practice is $500,000, this is the present cash outflow used in the calculation. If the discounted cash inflow over, say, two years, is greater than or equal to $500,000, then the investment will likely be profitable. See also: Present value.

Net Present Value (NPV)

What Does Net Present Value (NPV) Mean?

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project may yield. It is calculated as shown here:

Investopedia explains Net Present Value (NPV)

NPV compares the value of a dollar today to the value of that dollar at a future point, taking inflation and returns into account. If the NPV of a prospective project is positive, the project should be accepted. However, if NPV is negative, the project probably should be rejected because cash flows will be negative. For example, if a retail clothing business wants to purchase an existing store, it will estimate the future cash flows of the store and then discount those cash flows into one lump-sum present value amount, say, $565,000. If the owner of the store is willing to sell the business for less than $565,000, the purchasing company probably will accept the offer because it is a positive NPV investment. Conversely, if the owner will not sell for less than $565,000, the purchaser will not buy the store, as the investment presents a negative NPV and therefore will reduce the overall value of the clothing company.

Related Terms:
Discounted Cash FlowDCF
Discount Rate
Payback Period
Present ValuePV
Time Value of Money



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