what is net present value npv 
net present value npv is the difference between the present value of cash inflows and the present value of cash outflows over a period of time npv is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project npv is the result of calculations that find the current value of a future stream of payments using the proper discount rate in general projects with a positive npv are worth undertaking while those with a negative npv are not 1subscribe to term of the day and learn a new financial term every day stay informed and make smart financial decisions sign up now investopedia julie bangnet present value npv formulaif there s one cash flow from a project that will be paid one year from now then the calculation for the npv of the project is as follows if analyzing a longer term project with multiple cash flows then the formula for the npv of the project is as follows if you are unfamiliar with summation notation here is an easier way to remember the concept of npv 1n p v today s value of the expected cash flows today s value of invested cash begin aligned npv text today s value of the expected cash flows text today s value of invested cash end aligned npv today s value of the expected cash flows today s value of invested cash npv accounts for the time value of money and can be used to compare the rates of return of different projects or to compare a projected rate of return with the hurdle rate required to approve an investment 2 the time value of money is represented in the npv formula by the discount rate which might be a hurdle rate for a project based on a company s cost of capital such as the weighted average cost of capital wacc no matter how the discount rate is determined a negative npv shows that the expected rate of return will fall short of it meaning that the project will not create value 13in the context of evaluating corporate securities the net present value calculation is often called discounted cash flow dcf analysis it s the method used by warren buffett to compare the npv of a company s future dcfs with its current price 4the discount rate is central to the formula it accounts for the fact that as long as interest rates are positive a dollar today is worth more than a dollar in the future inflation erodes the value of money over time meanwhile today s dollar can be invested in a safe asset like government bonds investments riskier than treasurys must offer a higher rate of return however it s determined the discount rate is simply the baseline rate of return that a project must exceed to be worthwhile for example an investor could receive 100 today or a year from now most investors would not be willing to postpone receiving 100 today however what if an investor could choose to receive 100 today or 105 in one year the 5 rate of return might be worthwhile if comparable investments of equal risk offered less over the same period if on the other hand an investor could earn 8 with no risk over the next year then the offer of 105 in a year would not suffice in this case 8 would be the discount rate positive npv vs negative npva positive npv indicates that the projected earnings generated by a project or investment discounted for their present value exceed the anticipated costs also in today s dollars it is assumed that an investment with a positive npv will be profitable an investment with a negative npv will result in a net loss this concept is the basis for the net present value rule which says that only investments with a positive npv should be considered 1npv can be calculated using tables spreadsheets for example excel or financial calculators 