Net Present Value - NPV

Net Present Value - NPV

An approach used in capital budgeting where the present value of cash inflows is subtracted by the present value of cash outflows. NPV is used 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 will yield.

Formula:

Notes:

NPV compares the value of a dollar today versus the value of that same dollar in the future, after taking inflation and return into account.

If the NPV of a prospective project is positive, then it should be accepted. However, if it is negative, then the project probably should be rejected because cash flows are negative.

See also: Capital Budgeting, Cash Flow, Discounted Cash Flow - DCF, Internal Rate of Return - IRR, MIRR, Payback Period, Present Value - PV, Time Value of Money