Net Present Value (NPV)

Net present value is a core metric used by company executives, investors and financial analysts to assess the viability of a given project and to compare the financial viability of several projects to find the one(s) that meet hurdle rates of return and which optimise capital investment. At the heart of the NPV calculation is the time value of money. The value of money today is greater than the value of money in the future because money invested today generates future returns and the future value of money erodes through inflation. NPV is arrived at by discounting expected future value over the lifetime of a project to a value today using a discount rate (which can be a company’s cost of capital or another appropriate rate). If the present value of expected future returns is greater than the initial outlay, the project is worth funding. The project or capital investment that yields the highest NPV from a range of options is the one a company or an investor should consider funding.