Net Present Value – NPV

The following is the formula for calculating NPV:

Net Present Value (NPV)

where

Ct = net cash inflow during the period t

C= total initial investment costs

r = discount rate, and

t = number of time periods

A positive net present value indicates that the projected earnings generated by a project or investment (in present Pounds / Dollars) exceeds the anticipated costs (also in present Pounds / Dollars).

Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a net loss. This concept is the basis for the Net Present Value Rule, which dictates that the only investments that should be made are those with positive NPV values.

When the investment in question is an acquisition or a merger, you might also opt to use the Discounted Cash Flow (DCF) metric.

Apart from the formula itself, net present value can often be calculated using tables or spreadsheets such as Microsoft Excel