NPV

Business Finance

Net Present Value (NPV) is the sum of all future cash flows from a project, discounted to present value, minus the initial investment. NPV > 0 means the project earns more than the discount rate (cost of capital) — accept. NPV < 0 means it destroys value — reject. The discount rate matters enormously: a project with $1M cash flows over 5 years has very different NPVs at 5% vs. 15% discount rates. NPV is the academically correct way to evaluate projects, superior to payback period and accounting return measures. Sensitive to assumptions about cash flow estimates and discount rate — sensitivity analysis is essential.