Net present value rule

Net present value rule

An investment is worth making if it has a positive NPV. Projects with negative NPVs should be rejected.

Net Present Value Rule

In investing, a rule stating that one should only make an investment if the net present value of its return is positive. That is, an investment only results in a profit for the investor if the discounted value of future cash flows is more than the amount one invests.
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It would be a strange world where political decisions are made solely according to the net present value rule; where one day we may fight profitable wars, rather than just wars, and we may educate only those children who are worthy because they are expected to be good investments.
Note that the fist two approaches represent the net present value rule, the third is a variant of the IRR approach and the last is the marginal rate of return approach.
Starting with the net present value rule, the author highlights the relevance of project cash flows, time value of money as well as project risk and presents the internal rate of return as well as profitability index models as variations of the same theme.