⊿ Point. {R} Glossary. ◢ Keyword: N. ◥ University. {q} PhD. {tr} Training. ⚫ UK. ⚫ England. ⬤ London. ↂ EndNote. ☗ MDX. MDX: PhD. ↂ Blogger. RSK666-0000095. Net present value. Valuation in finance The net present value (NPV) or net present worth (NPW)[1] applies to a series of cash flows occurring at different times. The present value of a cash flow depends on the interval of time between now and the cash flow. It also depends on the annual effective discount rate. NPV accounts for the time value of money. It provides a method for evaluating and comparing capital projects or financial products with cash flows spread over time, as in loans, investments, payouts from insurance contracts plus many other applications.
Time value of money dictates that time affects the value of cash flows. NPV is determined by calculating the costs (negative cash flows) and benefits (positive cash flows) for each period of an investment. Because of its simplicity, NPV is a useful tool to determine whether a project or investment will result in a net profit or a loss. Formula[edit] Each cash inflow/outflow is discounted back to its present value (PV). Where: ) where is given by: where.