What is Net Present Value?

  • October 28, 2020 03:07 PM AEDT
  • Team Kalkine
    Team Kalkine
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Net Present Value (or NPV) is defined as the sum of the present value of all future cash flows (negative or positive) discounted at a required rate of return of a project. It could also be defined as the difference between the present value of future cash inflows discounted at a required rate of return and the present value of the initial cash outflow.

Well, the answer to that lies in the time value of money and the opportunity cost. An opportunity cost is what a resource is worth in its next best use or could also be defined as a return forgone for choosing an alternative. Coming back to for example, suppose if the current return on saving accounts is 10 percent per annum (10% p.a.). The ideal choice would be to accept a $100 bill today, as you can invest that $100 in your saving accounts, which would generate an extra $10 for you in a year.

 


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