Corporate finance
What is net present value?
NPV discounts cash flows from different dates to today and sums them.
Definition
NPV discounts cash flows from different dates to today and sums them.
Intuition
The same amount received later is usually worth less than receiving it today.
Formula
NPV is the sum of every cash flow from time zero onward, discounted to today.
Example
- Enter an initial investment of 1,000; the tool treats it as a time-zero outflow.
- Enter 600 for year one and year two, then set the discount rate to 10%.
- NPV is about 41.32, leaving a positive modeled value after applying the 10% hurdle rate.
Common mistakes
Do not omit the time-zero outlay or treat the discount rate as an observed certainty.