Net Present Value (NPV) measures the present value of an investment, taking into account the sum of its future cash flows discounted appropriately. NPV is calculated by the formula:
$$NPV \mmlToken{mo}[linebreak="auto"]{=}-C_{0}+\sum_{i=1}^{t}\frac {C_{i}}{(1+r)^{i}}$$
C0— initial investment;
r— discount rate (e.g., weighted average cost of capital);
t— number of periods.
As a general rule, all cash outflows should be negative in the formula, while inflows should be positive. The Greek symbol "Σ" (sigma) denotes summation in mathematics.
See also:
- Internal Rate of Return (IRR)
- Modified Internal Rate of Return (MIRR)
- Profitability Index (PI)
- Future Value
- Present Value
- Present Value of Annuity
Frequently asked questions
What does net present value mean?
Net present value measures how much an investment is worth today after discounting its expected future cash flows.
What does a positive NPV indicate?
A positive NPV generally indicates that the investment is expected to create value above the required rate of return.
What discount rate is used in NPV?
The discount rate often reflects the required return or the weighted average cost of capital for the project.
