Net present value

What it means

Net present value compares today’s cost with the present value of future cash flows. A positive NPV supports value creation only when the inputs and discount rate are defensible.

How to do it

1. Map the cash flows

Separate the initial investment, operating cash flows, terminal value and timing. Do not substitute accounting profit for cash flow.

2. Choose and explain the rate

Use the required discount rate or justify one that matches the risk and period of the cash flows.

3. Discount and add

Discount each cash flow to time zero, add the present values, then subtract the initial investment.

Common mistakes & limitations

Check the assumptions

NPV is sensitive to forecasts, terminal values and discount rates. It does not remove uncertainty or prove that a forecast will occur.

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