Net Present Value
Also called: NPV
What is Net Present Value?
Net present value discounts an investment's future cash flows back to today's value at a chosen rate, then subtracts the initial cost. A positive NPV means the investment creates value at that rate.
Why Net Present Value matters
A rupee next year is worth less than a rupee today, and for multi-year commitments — a new outlet, a long lease — ignoring that distorts the decision.
Net Present Value formula
NPV = Σ (Cash flow in year t ÷ (1 + r)^t) − Initial investment
r is the discount rate representing your cost of capital.
How Net Present Value works in practice
Use a discount rate that reflects your genuine cost of capital, then test how sensitive the result is to it. If a small change in the rate flips the answer, the decision is close and deserves more caution than arithmetic.
Frequently asked questions
Your realistic cost of capital — a blend of borrowing cost and the return you expect on your own money.