Present value (PV) is the current value of a future sum of money or stream of cash flow given a specified rate of return. Meanwhile, net present value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
Difference Between PV and NPV
While both PV and NPV use discounted cash flows to estimate the current value of future income, these calculations differ in one important way. The NPV formula accounts for the initial capital outlay required to fund a project, making it a net figure, while the PV calculation only accounts for cash inflows. Though understanding the concept behind the PV calculation is important, the NPV formula is a much more comprehensive indicator of a given project's potential profitability.
Since the value of revenue earned today is higher than that of revenue earned down the road, businesses discount future income by the investment's expected rate of return. This rate, called the hurdle rate, is the minimum rate of return a project must generate for the business to consider investing in it.
Calculating PV and NPV
The PV calculation indicates the discounted value of all revenue generated by the project, while the NPV indicates how profitable the project will be after accounting for the initial investment required to fund it.
For example, assume a given project requires an initial capital investment of $15,000. The project is anticipated to generate revenues of $3,500, $9,400 and $15,100 in the next three years, respectively, and the company's hurdle rate is 7%.
The present value of the anticipated income is:
$3,500 / (1 + 0.07) ^ 1) + $9,400 / (1 + 0.07) ^ 2 + $15,100 / (1 + 0.07) ^ 3, or $23,807.
The NPV of this project can be determined by simply subtracting the initial capital investment from the discounted revenue:
$23,807  $15,000 = $8,807.
While the PV value is useful, the NPV calculation is invaluable to capital budgeting. A project with a high PV figure may actually have a much less impressive NPV if a large amount of capital is required to fund it. As a business expands, it looks to finance only those projects or investments that yield the greatest returns, which in turn enables additional growth. Given a number of potential options, the project or investment with the highest NPV is generally pursued.

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 Answer >> 
What is the formula for calculating net present value (NPV) in Excel?
Net present value is used to estimate the profitability of projects or investments. Here's how to calculate NPV using Microsoft ... Read Answer >> 
Present Value vs Internal Rate of Return
NPV and IRR are popular ways to measure the return of an investment project. Learn how net present value and internal rate ... Read Answer >> 
How do you calculate costs of capital when budgeting new projects?
Discover how a company should estimate its costs of capital when budgeting for a new business project using the weighted ... Read Answer >> 
How do hurdle rate MARR and internal rate of return IRR relate?
In capital budgeting, projects are evaluated by comparing the internal rate of return (IRR) to the hurdle rate, also known ... Read Answer >>

Investing
Time Value Of Money: Determining Your Future Worth
Determining monthly contributions to college funds, retirement plans or savings is easy with this calculation. 
Investing
Understanding the Time Value of Money
Find out why time really is money by learning to calculate present and future value. 
Small Business
Capital Budgeting: Which is Better, IRR or NPV?
Using internal rate of return and net present value for capital budgeting evaluations often end in the same result. But there are times when using NPV to discount cash flows makes more sense. 
Investing
What is Present Value?
Present value tells us how much a future sum of money is worth today, given a specified rate of return. This is an important financial concept based on the principle that money received in the ... 
Investing
Top 3 Pitfalls Of Discounted Cash Flow Analysis
The Discounted Cash Flow (DCF) method can be difficult to apply to reallife valuations. Find out where it comes up short. 
Investing
How to calculate required rate of return
The required rate of return is used by investors and corporatefinance professionals to evaluate investments. In this article, we explore the various ways it can be calculated and put to use.

Profitability Index
The profitability index is a technique used to measure a proposed ... 
Bullet Bond
A bullet bond is a debt instrument whose entire face value is ... 
Profitability Index Rule
The profitability index rule is a regulation for evaluating whether ... 
ProfitVolume (PV) Chart
A profitvolume (PV) chart is a graphic that shows earnings (or ... 
Discounting
Discounting is the process of determining the present value of ... 
Rate of Return
A rate of return is the gain or loss on an investment over a ...