What is 'Net Present Value Rule'
The net present value rule is the idea that company managers and investors should only invest in projects, or engage in transactions that have a positive net present value (NPV). They should avoid investing in projects that have a negative net present value. It is a logical outgrowth of net present value theory.
BREAKING DOWN 'Net Present Value Rule'
According to the net present value theory, investing in something that has a net present value greater than zero should logically increase a company's earnings. In the case of an investor, the investment should increase the shareholder's wealth. Companies may also participate in projects with NPV when they communicate goodwill or ongoing investments to shareholders.
Although most companies follow the net present value rule, there are circumstances where it is not a factor. For example, a company with significant debt issues may abandon, or postpone, undertaking a project with a positive NPV. The company may take the opposite direction as it redirects capital to resolve an immediately pressing debt issue. Poor corporate governance can also be why a company ignores or miscalculates NPV.
Understanding Net Present Value
Net present value, commonly seen in capital budgeting projects, accounts for the time value of money (TVM). Time value of money is the idea that future money has less value than presently available capital, due to the earnings potential of the present money. A business will use a discounted cash flow (DCF) calculation which will reflect the potential change in wealth from a particular project. The computation will factor in the time value of money by discounting the projected cash flows back to the present, using a company's weighted average cost of capital (WACC). A project or investment's NPV equals the present value of net cash inflows, which the project is expected to generate, minus the initial capital required for the project.
Using the Net Present Value Rule
During the company's decisionmaking process, they will use the net present value rule to decide whether to pursue a project, such as an acquisition. If the calculated NPV of a project is negative (< 0), the project is expected to result in a net loss for the company. As a result, and according to the rule, the company should not pursue the project. If a project's NPV is positive (> 0), the company can expect a profit and should consider moving forward with the investment.
If a project's NPV is neutral (= 0), the project is not expected to result in any significant gain or loss for the company. With a neutral NPV, management uses nonmonetary factors, such as goodwill, to decide on the investment.

Profitability Index
The profitability index is a technique used to measure a proposed ... 
Net Present Value Of Growth Opportunities ...
Net present value of growth opportunities is a calculation of ... 
Initial Cash Flow
Initial cash flow is the amount of money paid out or received ... 
Asset Valuation
Asset valuation is the process of determining the fair market ... 
Present Value Interest Factor Of ...
The present value interest factor of annuity is a factor that ... 
Betterment
Betterment is a type of action or cost expenditure that contributes ...

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
An Introduction To Capital Budgeting
We look at three widely used valuation methods and figure out how companies justify spending. 
Personal Finance
A project manager's qualifications and career path
Learn about a project manager's job, the qualifications necessary for the position, and the most common careers for these professionals. 
Investing
DCF Valuation: The Stock Market Sanity Check
Calculate whether the market is paying too much for a particular stock. 
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 ... 
Personal Finance
What to know for an investment banking interview
Find out what you need to know and how to prepare for an investment banking interview. 
Personal Finance
10 Ways to Improve Cash Flow in Construction
Improving cash flow in construction requires some sectorspecific strategies.

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 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 >> 
What is the difference between present value and net present value?
Understand the difference between the present value and net present value calculations and how these formulas are used in ... Read 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 Answer >> 
When evaluating terminal value, should I use the perpetuity growth model or the exit ...
Examine the important calculation of a terminal value in discounted cash flow analysis, and learn which method of calculating ... Read Answer >>