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Finance: Net Present Value in the real sense.


Net Present Value (NPV)......

The difference between the present value of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return.

For example, an investment of $1,000 today at 10 percent will yield $1,100 at the end of the year; therefore, the present value of $1,100 at the desired rate of return (10 percent) is $1,000. The amount of investment ($1,000 in this example) is deducted from this figure to arrive at net present value which here is zero ($1,000-$1,000). A zero net present value means the project repays original investment plus the required rate of return. A positive net present value means a better return, and a negative net present value indicates unfavourable returns.
Net present value takes into account the value of the dollar today compared to the value of the dollar in the future, which is why it is a very important value to look at before making any large financial decisions.

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