NPV is the sum of all future cash flows, each discounted to today, minus the initial investment.
Try this
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Project: −$1,000 now, then +$300, +$400, +$500, +$300 over 4 years. NPV = sum of discounted flows. = —
How to read NPV
- NPV > 0 — the project earns more than your required return: take it.
- NPV = 0 — it exactly meets your hurdle rate (that rate is the IRR).
- NPV < 0 — it falls short: reject it.
- Higher discount rate → lower NPV, because future cash is squeezed harder.
Try it
Invest $1,000, get back $1,150 in one year. NPV at 10%?
−1000 + 1150/1.10 ≈ +$45.45 — worth doing.
NPV is the single number that finance teams trust most: it's in today's dollars and it already accounts for the time value of money.
Positive NPV → the investment creates value at this discount rate. Negative NPV → it destroys value.