Economics
Net Present Value (NPV)
Quick fact
NPV is calculated by subtracting the initial investment from the present value of all future cash flows, using a discount rate that reflects the opportunity cost of capital.
Why this is interesting
Imagine you have $100 today. Would you rather keep it or invest it to get more money later? That’s the heart of net present value.
Read the full explanation
Understanding Net Present Value (NPV)
Net Present Value (NPV) helps you decide whether an investment is worth making. It takes into account that money today is more valuable than money in the future because it can be invested to earn returns. By converting all cash flows to their current value, NPV gives a clear picture of how profitable a project will be.
A deeper explanation
NPV works by discounting expected future cash flows back to their present-day value using a rate that reflects the time value of money. This means you adjust for inflation and opportunity costs. If the NPV is positive, it indicates that the investment's returns exceed its cost and are therefore worth pursuing. A negative NP, on the other hand, suggests the project may not be profitable.