Net Present Value (NPV)

Net Present Value (NPV) is a financial metric used to assess the profitability of a project or investment by calculating the difference between the present value of cash inflows and the present value of cash outflows over a specific time frame. NPV takes into account the time value of money, meaning it adjusts future cash flows to reflect their current value.

The formula for NPV is:

NPV = Σ (Cash Inflows / (1 + r)^t) - Initial Investment

Where:

• r = Discount rate (often the company’s required rate of return)

• t = Time period (often years)

• Cash Inflows = Cash received from the investment

A positive NPV indicates that an investment is expected to generate more value than its cost, while a negative NPV suggests that the investment will not meet the required return.