Definition of 'Net Present Value - NPV'

This works on the basis that money is more valuable now than in say 5 years time. It gives the difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyse the profitability of an investment or project. This is the sum of the present value (PV)

The following is the formula for calculating NPV:

Where:

C_t = net cash inflow during the period

C_o= initial investment

r = discount rate, and

t = number of time periods