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Net Present Value (NPV)

Definition

The sum of present values of all cash flows (positive and negative) of a project or investment.

How It Works

Discount each cash flow to time zero using the required rate and sum them. Positive NPV means the project creates value above the hurdle rate.

Formula

NPV = Σ CF_t/(1+r)^t

Example

A project with cash flows of -$100, +$60, +$60 at 10% has NPV = $4.13.

Common Misconceptions

✗NPV = profit (it is not; it accounts for time value)
✗You should always pick the highest NPV regardless of scale

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FAQs

Common questions about Net Present Value (NPV)

The project destroys value—its returns do not meet the required rate.

Yes. Zero NPV means the project earns exactly the required return. It neither creates nor destroys value. The IRR at zero NPV equals the discount rate.