Net present value (NPV).
In plain English
Net present value discounts every expected cash inflow and outflow back to today at a chosen rate, then adds them up. A positive result means the investment is expected to produce more than the required return, and the number itself is the surplus in today's dollars. A negative result means the opposite. The chosen discount rate carries most of the weight: raise it and distant cash flows shrink fast. Because the answer comes out in dollars rather than percentages, projects of different sizes can be compared on how much value each one adds.
01Why it matters
It answers the question a percentage cannot: not just whether an investment beats the bar, but how much money clearing that bar is actually worth.
02The math, step by step
A machine costs $250,000 and is expected to produce $100,000 a year for three years, discounted at 10 percent. The three inflows are worth $90,909, $82,645, and $75,131 today, a total of $248,685. Subtract the $250,000 cost and net present value is negative $1,315.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Adding up raw future cash ignores that a dollar in year five is worth less than a dollar today. Net present value discounts first, then subtracts the cost. A project with healthy total profit can still carry a negative net present value.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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