Definition
Net Present Value (NPV) is the sum of all future project cash flows discounted to present value, minus the initial investment. A positive NPV indicates the project creates value above the discount rate; negative NPV means it destroys value.
Formula
NPV = Σ_t (CF_t / (1+r)^t) − CF_0Where:
- CF_t = cash flow at time t
- r = discount rate (WACC)
- CF_0 = initial investment (positive number, subtracted)
Key Takeaways
- NPV = present value of future cash flows minus initial investment.
- Positive NPV = project creates value.
- Discount rate = cost of capital.
- Complements IRR for investment decisions.
- Use Excel NPV() or XNPV() function.
Frequently Asked Questions
3 commonly searched questions about NPV (Net Present Value).
What is NPV?
Sum of discounted future cash flows minus initial investment. NPV > 0 = project creates value at chosen discount rate. NPV < 0 = destroys value.
What discount rate to use?
Investor's cost of capital (WACC). Pension fund: 5–8%. Private equity: 12–18%. Hurdle rate often used directly as discount rate.
NPV vs. IRR?
NPV: absolute dollar value. IRR: percentage return. Both measure project value but from different angles. Use both for complete picture.
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