Net Present Value

Net Present Value or NPV is a significant measurement in business investment decisions. NPV is essentially a measurement of all future cashflow which includes revenues minus costs, also referred to as net benefits that will be derived from a particular investment, whether in the form of a project, a new product line, a proposition, or an entire business, minus the cost of the investment.

Logically if a proposition has a positive NPV then it is profitable and is worthy of consideration. If negative then it's unprofitable and should not be pursued. While there are many other factors besides a positive NPV which influence investment decisions; NPV provides a consistent method of comparing propositions and investment opportunities from a simple capital, investment, profit perspective. There are different and complex ways to construct NPV formulae, largely due to the interpretation of the 'discount rate' used in the calculations to enable future values to be shown as a present value. Corporations generally develop their own rules for NPV calculations, including discount rate. NPV is not easy to understand for non-financial people - wikipedia seems to provide a good detailed explanation if you need one.

Updated On: 09.10.04