DEFINITION of 'Net Present Value  NPV'
The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project.
The following is the formula for calculating NPV:
where:
C_{t} = net cash inflow during the period
C_{o}= initial investment
r = discount rate, and
t = number of time periods
In addition to the formula, net present value can often be calculated using tables, as well as spreadsheets such as Microsoft Excel.
INVESTOPEDIA EXPLAINS 'Net Present Value  NPV'
Determining the value of a project is challenging because there are different ways to measure the value of future cash flows. Because of the time value of money, a dollar earned in the future won’t be worth as much as one earned today. The discount rate in the NPV formula is a way to account for this. Companies have different ways of identifying the discount rate, although a common method is using the expected return of other investment choices with a similar level of risk.
For example, if a retail clothing business wants to purchase an existing store, it would first estimate the future cash flows that store would generate, and then discount those cash flows into one lumpsum present value amount of, say $565,000. If the owner of the store was willing to sell his business for less than $565,000, the purchasing company would likely accept the offer as it presents a positive NPV investment. Conversely, if the owner would not sell for less than $565,000, the purchaser would not buy the store, as the investment would present a negative NPV at that time and would, therefore, reduce the overall value of the clothing company.
Interested in more information on Net Present Value (NPV)? Check out Time Value of Money: Determining Your Future Worth and our Introduction To Corporate Valuation Methods.
VIDEO

PeerToPeer (Virtual Currency)
The exchange or sharing of information, data, or assets between ... 
Combined Ratio
A measure of profitability used by an insurance company to indicate ... 
Overall Liquidity Ratio
A measurement of a company’s capacity to pay for its liabilities ... 
DebtToIncome Ratio  DTI
A personal finance measure that compares an individual's debt ... 
Ratio Analysis
Quantitative analysis of information contained in a company’s ... 
Gross Expense Ratio  GER
The total percentage of a mutual fund's assets that are devoted ...

When evaluating terminal value, should I use the perpetuity growth model or the exit ...
In discounted cash flow (DCF) analysis, neither the perpetuity growth model nor the exit multiple approach is likely to render ... Read Full Answer >> 
What is the relationship between the hurdle rate (MARR) and the Internal Rate of ...
In capital budgeting, projects are often evaluated by comparing the internal rate of return, or IRR, on a project to the ... Read Full Answer >> 
What is the formula for calculating the internal rate of return (IRR)?
Computing the internal rate of return (IRR) for a possible investment is timeconsuming and inexact. IRR calculations must ... Read Full Answer >> 
What is the formula for calculating net present value (NPV)?
Net present value (NPV) is a method of determining the current value of all future cash flows generated by a project after ... Read Full Answer >> 
What is the formula for calculating internal rate of return (IRR) in Excel?
The internal rate of return (IRR), is a profitability metric used by businesses to determine which projects are likely to ... Read Full Answer >> 
What is the formula for calculating net present value (NPV) in Excel?
Net present value (NPV) is a popular measure of profitability used in corporate budgeting to assess a given project's potential ... Read Full Answer >> 
Why would you take DCF into account rather than simply projecting future revenues?
Discounted cash flow, or DCF, analysis is preferred by market analysts for two basic reasons. One, because of the firmly ... Read Full Answer >> 
How do you use DCF for real estate valuation?
Discounted cash flow analysis, or DCF, is very commonly used in evaluation of real estate investments, although determining ... Read Full Answer >> 
What are the difference between gross revenue reporting and net revenue reporting?
Recognizing and reporting revenue are critical and complex problems for accountants. There are many gray areas in both recognition ... Read Full Answer >> 
What are the differences between gross profit and net income?
When preparing either an income statement or an income tax return for a business, accountants provide calculations for both ... Read Full Answer >> 
Which of the following is not needed to calculate the net present value of an investment?
A. The amount of interest expected to be generated each yearB. The time horizon – how long the investment is expected to ... Read Full Answer >> 
Under the Investment Company Act of 1940, an investment company, or mutual fund company, ...
A. $25,000B. $50,000C. $100,000D. $500,000 Correct answer: CAn investment company (mutual fund) must have at least ... Read Full Answer >> 
Under the Investment Company Act of 1940, an investment company must have minimum ...
A. $25,000B. $50,000C. $100,000D. $500,000 Correct answer: CAn investment company (mutual fund) must have ... Read Full Answer >> 
What are the disadvantages of using net present value as an investment criterion?
While net present value (NPV) calculations are useful when you are valuing investment opportunities, the process is by no ... Read Full Answer >> 
What's the difference between net present value and internal rate of return? How ...
Both of these measurements are primarily used in capital budgeting, the process by which companies determine whether a new ... Read Full Answer >> 
What are the advantages and disadvantages to dealing with internetonly banks?
In recent years, large companies have set up internetonly banks as a means of diversifying into the financial sector and ... Read Full Answer >> 
Is it possible for a company to have a positive cash flow and a negative net income?
This situation may seem a bit counterintuitive at first, but it is actually quite common and not too difficult to understand. ... Read Full Answer >> 
Which is a better measure for capital budgeting, IRR or NPV?
In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ... Read Full Answer >> 
Why do some closedend mutual funds trade above or below their net asset values?
Intuition tells us that a mutual fund's net asset value (NAV) (the net value of all assets within the mutual fund's portfolio ... Read Full Answer >>

Investing
Days Payable Outstanding
Days Payable Outstanding, or DPO, is an accounting measurement that tells the average number of days it takes a company to pay its suppliers and vendors. Days Payable Outstanding is widely used ... 
Investing
Net Operating Income
Net operating income (NOI) reflects income after operating expenses are deducted, but before income taxes and interest are deducted. 
Investing Basics
Current Assets
Current assets are all of the assets a company uses to fund its daily operations. These are the assets the company could convert into cash within a year in the normal course of business. 
Investing Basics
Liquidity Vs. Solvency
Learn about the differences between these two words and how each one is used in the stock market. 
Investing Basics
Liquid & Illiquid Assets
The easier it is to convert the asset, the more liquid the asset is considered. 
Investing
Zooming In On Net Operating Income
NOI is a longrun profitability measure that smart investors can count on. 
Fundamental Analysis
Valuing Firms Using Present Value Of Free Cash Flows
When trying to evaluate a company, it always comes down to determining the value of the free cash flows and discounting them to today. 
Personal Finance
Assets That Increase Your Net Worth
Your home, properties and vehicles can all increase your net worth. 
Investing
The Importance Of Knowing Your Net Worth
It is vital that you track your net worth no matter what your age. 
Investing Basics
Calculating The Present And Future Value Of Annuities
At some point in your life, you may have had to make a series of fixed payments over a period of time  such as rent or car payments  or have received a series of payments over a period of time, ...