Net Present Value (NPV)

Formal

‘Net Present Value’ - an investment appraisal technique that takes the minimum investment return required by companies and applies this percentage rate to the projected cash inflows and outflows from that project (See DCF). The answer is either positive or negative - positive is a surplus, based on today’s money values and therefore leads to project acceptance. A negative result effectively fails (in real terms) to deliver the required return.

Real-world Example

A project costs $50,000 today but is expected to generate $70,000 in future cash flows. Once those future cash flows are discounted back to today's value, the NPV comes out at $8,000 - a positive figure, meaning the project is expected to add value.