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Glossary Finance

Net present value (NPV)

Net present value (NPV) is the sum of an investment's future cash flows, each discounted back to today's money, minus the initial cost.

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In more detail

The formula is NPV = Σ cash flow / (1 + r)^t, with the outlay at t = 0. At a 10% discount rate, paying $1,000 now for $450 a year over three years has an NPV of $119.08: positive, so it beats a 10% alternative. Money today is worth more than money later, which is why future amounts are discounted. See Internal rate of return (IRR).

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See also

  • Glossary Internal rate of return (IRR)
    The internal rate of return (IRR) is the yearly discount rate at which the present value of an investment's cash flows adds up to zero.
  • Glossary Return on investment (ROI)
    Return on investment (ROI) is the gain or loss on an investment as a percentage of what was invested.
  • Glossary Compound interest
    Compound interest is interest calculated on the original amount plus all the interest already added, so growth builds on itself.
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