Glossary
Net Present Value
The present value of future returns minus the cost
Net present value adds up the present value of all cash an investment will produce and subtracts what it costs to start. A positive figure means the investment is worth making.
Its strength is capturing timing and scale together. Money trickling in over five years and money arriving within three can be compared on the same basis.
Spend 100,000 to earn 30,000 a year for five years and the raw total is 150,000, but discounting brings it lower. If the discounted figure still exceeds 100,000, NPV is positive.
Companies use it as the standard test for building a plant or entering a new business. Several proposals are lined up and the one with the highest NPV wins.
The weakness is that you supply the future cash flows and the discount rate yourself. Nudge either and the answer flips. Running several scenarios to see how much the case can withstand matters more than the single headline number. In practice, many projects showing a positive NPV turn out to rest on optimistic revenue assumptions once the workings are examined.