Net present value (NPV) - Financial definition
Financial acronyms
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Concise definition of the term net present value
Net Present Value (NPV) is a financial metric used to assess the profitability and value of an investment or project. It represents the difference between the present value of cash inflows and the present values of cash outflows.
Comprehensive definition of the term net present value
The concept behind NPV is that the value of money decreases over time due to factors such as inflation and the opportunity cost of capital. Therefore, future cash flows are discounted back to their present value using a discount rate that reflects the time value of money.
A positive NPV indicates that the investment is expected to generate more cash inflows than the initial investment, resulting in a net gain. A negative NPV suggests that the investment will result in a net loss. Therefore, a positive NPV is generally considered favorable, while a negative NPV may indicate a less desirable investment.