Net Present Value

Net present value (NPV) is a standard method for the financial appraisal of long-term projects. Used for capital budgeting, and widely throughout economics, it measures the excess or shortfall of cash flows, in present value (PV) terms, once financing charges are met. By definition,

NPV = Present value of net cash flows. For its expression, see the formula section below.

Formula

Each cash inflow/outflow is discounted back to its PV. Then they are summed. Therefore


Where

t - the time of the cash flow

n - the total time of the project

r - the discount rate

C_t - the net cash flow (the amount of cash) at time t.

C₀ - the capital outlay at the beginning of the investment time ( t = 0 )