Net Present Value
NPV = Σ CF_t / (1+r)^t - Initial Cost
Sum the present values of all project cash flows minus the initial investment. Positive NPV means value creation.
Variables
Net cash flow in period t
Required return (often WACC)
Time period of the cash flow
Example Calculation
Scenario
Project costs $500 now and returns $300 in year 1 and $300 in year 2 at 10%.
Given Data
Calculation
NPV = 300/1.10 + 300/1.10^2 - 500 = 272.73 + 247.93 - 500 = 20.66
Result
$20.66
Interpretation
Positive NPV means the project creates $20.66 in value above the required return.
When to Use This Formula
- ✓Project acceptance or rejection
- ✓Comparing mutually exclusive projects
- ✓Any investment with known cash flows
Common Mistakes
- ✗Forgetting initial cost is negative (time 0 outflow)
- ✗Mixing nominal and real discount rates
Calculate This Formula Instantly
Snap a photo of any problem and get step-by-step solutions.
Download FinanceIQFAQs
Common questions about this formula
Yes. Under standard assumptions, positive NPV projects increase shareholder wealth.
Use the project's required return, which is typically the firm's WACC for average-risk projects. For riskier projects, add a premium above WACC. The discount rate should reflect the risk of the cash flows being discounted.