# Net Present Value - NPV

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.

NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

Formula:

In addition to the formula, net present value can often be calculated using tables, and spreadsheets such as Microsoft Excel.

NPV compares the value of a dollar today to the value of that same dollar in the future, taking inflation and returns into account. If the NPV of a prospective project is positive, it should be accepted. However, if NPV is negative, the project should probably be rejected because cash flows will also be negative.

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 lump-sum present value amount, 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.

Investment dictionary. . 2012.

### Look at other dictionaries:

• Net present value (NPV) — The present value of the expected future cash flows minus the cost. The New York Times Financial Glossary …   Financial and business terms

• net present value — (NPV). The value of future cash flows, discounted to today s value. Practical Law Dictionary. Glossary of UK, US and international legal terms. www.practicallaw.com. 2010 …   Law dictionary

• Net present value — In finance, the net present value (NPV) or net present worth (NPW)[1] of a time series of cash flows, both incoming and outgoing, is defined as the sum of the present values (PVs) of the individual cash flows of the same entity. In the case when… …   Wikipedia

• Net Present Value Rule — A rule stating that an investment should be accepted if its net present value is greater than zero and rejected otherwise. According to the theory of net present value (NPV), participating in a positive NPV project will increase firm or… …   Investment dictionary

• net present value — ( NPV) The present value of the expected future cash flows minus the cost. Bloomberg Financial Dictionary * * * net present value net present value ➔ value1 * * *    ► See Present Value. * * * …   Financial and business terms

• net present value — NPV A method of capital budgeting in which the value of an investment is calculated as the total present value of all cash inflows, cash outflows minus the cost of the initial investment. If the net present value is positive the investment should …   Accounting dictionary

• net present value — NPV A method of capital budgeting in which the value of an investment is calculated as the total present value of all cash inflows and cash outflows minus the cost of the initial investment. If the net present value is positive the investment… …   Big dictionary of business and management

• Net Present Value — Die Artikel Kapitalwert und Discounted Cash Flow überschneiden sich thematisch. Hilf mit, die Artikel besser voneinander abzugrenzen oder zu vereinigen. Beteilige dich dazu an der Diskussion über diese Überschneidungen. Bitte entferne diesen… …   Deutsch Wikipedia

• net present value — NPV The value of an investment derived from comparisons of costs with the present value of anticipated future, incremental *cash flows. The *present value of cash flows is calculated by applying an appropriate *cost of capital rate to each… …   Auditor's dictionary

• net present value — (NPV) The present value of the stream of net cash flows resulting from a project, discounted at the firm s cost of capital, minus the project s net investment. It is used to evaluate, rank, and select from among various investment projects …   Black's law dictionary