**Calculate Net Present Value**

The difference between the present value of cash inflows and the present value of cash outflows.

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**Interpretation:**

Remember that even though a project offers a positive NPV, the projected cash flows are still estimations. The accuracy of these projected figures depends on the skill and experience of the analyst, and likelihood of these cash flows materializing depends on the financial risk associated with the type of project being pursued.

However, even though your projected capital project returned a negative NPV, it may still be worth pursuing. The valuation of real options in a capital budgeting decision could increase the NPV of a project. For example, research and development projects are risky because the product created is not guaranteed to be successful; however, if it is successful, the potential payoff could be substantial. Alternately, NPV could be negative also because the required rate of return may be unrealistically high, or the cash flows projected may be too conservative.

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**Related Links:**

- Understanding the Time Value of Money - Find out how time really is money by learning to calculate present and future value.