Net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. NPV is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.
- Net present value (NPV) is used to calculate the current value of a future stream of payments from a company, project, or investment.
- To calculate NPV, you need to estimate the timing and amount of future cash flows and pick a discount rate equal to the minimum acceptable rate of return.
- The discount rate may reflect your cost of capital or the returns available on alternative investments of comparable risk.
- If the NPV of a project or investment is positive, it means its rate of return will be above the discount rate.