Net Present Value

The Net Present Value (NPV) is the difference between the present value of (future) cash inflows and the present value of (future) cash outflows associated with a certain investment over a period of time. It takes into account the time value of money. The NPV is often calculated using the following formula:

 

A positive NPV indicates that the projected earnings generated by a project or investment exceeds the anticipated costs. Generally, an investment with a positive NPV will be profitable, whereas an investment with a negative NPV will result in a net loss. NPV is therefore a useful tool to determine whether a project or investment should be pursued.