NPV = Present Value of Future Cash Flows
Image: Artist is Elihu Vedder (1836–1923). Photographed 2007 by Carol Highsmith (1946–), who explicitly placed the photograph i, Public domain, via Wikimedia Commons
Net present value
NPV = Present Value of Future Cash Flows
NPV is a financial metric used to determine the value of an investment by considering the time value of money. It helps investors and businesses assess whether future cash flows are worth more or less than the initial investment cost.
Example
If an investment promises $1,000 in 5 years and the discount rate is 5%, the present value (PV) is calculated as $1,000 / (1 + 0.05)^5 = $783.53. This means that $1,000 received in 5 years is equivalent to $783.53 today.
Remember this
Understanding NPV is crucial for making informed financial decisions and comparing alternative investment opportunities.
Text adapted from Wikipedia, licensed under CC BY-SA 4.0.
Related concepts
Outline of finance
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$100 today is worth more than $100 in the future
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the Capital Asset Pricing Model (CAPM) says
CAPM formula: expected return = Rf + β(Rm - Rf)
Quantity theory of money
MV = PY equation
Educational content, not financial advice.
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