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TERM
NPV (Net Present Value)
Value today of future cash flows discounted back.
Definition
NPV sums future inflows and outflows discounted to present value, used to assess projects.
How to Calculate
NPV equals sum of cash flow divided by (1 plus discount rate) to the power of time.
Why it Matters
Accounts for time value of money.
Key Advantages
Compares options on a common basis.
Example
A promo with $50,000 NPV beats one with $20,000.
Use it to
Discount expected future cash flows from an initiative to today to judge economic value. Approve projects with positive NPV and rank competing plans by magnitude of value created.
