Net Present Value
Investor Term:
NPV
Definition:
Net present value (NPV) is a financial measure used to evaluate the profitability of an investment. It is calculated by discounting the future cash flows of an investment to their present value. The present value is the value of money today, taking into account inflation and other factors that affect the value of money over time.
Formula:
NPV = Sum of All Cash Flows (Cash Flow Year / (1 + Discount Rate) ^ Year)
Example:
The discount rate is the rate of return that an investor expects to earn on an investment of similar risk. The higher the discount rate, the lower the NPV of an investment.
A positive NPV means that the investment is expected to generate a profit, while a negative NPV means that the investment is expected to generate a loss.