What is NPV?

Definition of NPV

NPV is the acronym for net present value, which can be calculated as follows:

  • The present value of the future cash inflows
  • Minus the cash investment

Example of NPV

Assume that a company makes a cash investment of $500,000 in a project that is expected to provide future cash inflows of $100,000 at the end of each year for 10 years.

The future cash receipts of $100,000 at the end of each year for 10 years needs to be discounted to their present value. If the future cash amounts are discounted by 14% per year compounded annually (the company's required return), it will result in a present value of approximately $522,000.

The $522,000 of present value coming in minus the $500,000 of present value going out results is a positive net present value of $22,000. In other words, the company will earn slightly more than 14% per year on its $500,000 investment.