Quick Definition

Net Present Value (NPV) is a financial metric used to evaluate the profitability of an investment by calculating the difference between the present value of cash inflows and outflows over a period of time.

Formula

Examples

• 1Evaluating a new project investment by a company to determine if the expected future cash flows discounted back to their present value are greater than the initial investment cost.
• 2A real estate developer uses NPV to decide whether to proceed with a new residential development project by comparing the present value of expected rental income against construction costs.
• 3An investor considering the purchase of a long-term bond calculates the NPV to see if the discounted future payments are more advantageous than other investment opportunities.
• 4A business assessing the viability of upgrading its equipment by comparing the cost of the upgrade against the present value of expected efficiency savings.

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