how the net present value rule is used
net present value commonly seen in capital budgeting projects accounts for the time value of money tvm the time value of money is the idea that future money has less value than presently available capital due to the earnings potential of the present money a business will use a discounted cash flow dcf calculation which will reflect the potential change in wealth from a particular project the computation will factor in the time value of money by discounting the projected cash flows back to the present using a company s weighted average cost of capital wacc a project or investment s npv equals the present value of net cash inflows the project is expected to generate minus the initial capital required for the project during the company s decision making process it will use the net present value rule to decide whether to pursue a project such as an acquisition if the calculated npv of a project is negative 0 the project is expected to result in a net loss for the company as a result and according to the rule the company should not pursue the project if a project s npv is positive 0 the company can expect a profit and should consider moving forward with the investment if a project s npv is neutral 0 the project is not expected to result in any significant gain or loss for the company with a neutral npv management uses non monetary factors such as intangible benefits created to decide on the investment 