GlossaryAdvanced
Net Present Value (NPV)
The sum of a series of future cash flows, each discounted back to the present, minus the initial cost -- used to assess whether an investment creates value.
Net Present Value (NPV) sums a series of expected future cash flows, each discounted back to today's present value (see Kaavon's "Present Value" glossary definition) at an assumed discount rate, then subtracts the investment's initial cost.
A positive NPV generally suggests an investment is expected to create value above the chosen discount rate (often a required rate of return or cost of capital); a negative NPV suggests the opposite — a standard framework in traditional corporate finance for evaluating whether to proceed with an investment.
Examples
- A positive NPV suggests an investment's discounted future cash flows exceed its upfront cost, a standard signal it may be worth pursuing.
- NPV's result depends heavily on the discount rate chosen, which is itself an assumption, not a guaranteed input.