Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows over a period of time.
Formula
NPV = Σ [Cash Flowt / (1 + r)t] - Initial Investment
Interpretation
- NPV > 0: Investment adds value, consider accepting
- NPV = 0: Investment breaks even, indifferent
- NPV < 0: Investment destroys value, consider rejecting
Parameters
- Initial Investment: Upfront cost (outflow)
- Discount Rate: Opportunity cost of capital
- Cash Flows: Annual net cash inflows/outflows