Fundamental Glossary / Valuation Methods
Net Present Value (NPV)
The present value of a project's cash inflows minus the present value of its cash outflows, including the initial investment.
Formula
NPV = sum of cash flow in year t / (1 + discount rate) ^ t. The initial outlay is usually a negative cash flow at time zero.
What it means
NPV is the project-level use of discounted cash flow. A positive NPV means the project earns more than the discount rate and adds value. A negative NPV destroys value.
It is the right accept-or-reject test for a plant, an acquisition, or a product launch when the cash flows and the risk are understood.
How to read it
Rank projects by NPV, not by the size of the revenue. A large project with a small NPV can be worse than a small project with a large one. When capital is scarce, NPV per unit of scarce capital is the next cut.
What to watch
Sunk costs are ignored. Overhead that will be paid anyway is ignored. Cash flows that change because of the project are included. Most bad NPVs fail one of those three sentences.
This note explains the term. It is not a research recommendation, a target price, or a comment on any security. Ratios and regulatory thresholds change; use the latest filing or circular for a live figure.