Net Present Value

Net present value [NPV] is a means of valuing a future sum of money in today’s terms. Because of inflation, $100 in a year’s time is worth less than $100 today, so we need to discount future sums to work out their value in today’s terms. NPV is often used as a means of investment appraisal, comparing current cash outflows and future revenue inflows. If the NPV of a proposed project is positive, the project is viable and is a good use of funds. The approach requires two decisions. What will be the level of future revenue streams and cost outflows? What is the discount rate that will be used to reflect the required return on investment? See also Discounted Cash Flow and Weighted Average Cost of Capital.