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Definition of NPV

NPV Image 1

NPV

See net present value.


NPV

See: Net present value.



Related Terms:

Net present value (NPV)

The present value of the expected future cash flows minus the cost.


Net present value (NPV)

A discounted cash flow technique used for investment appraisal that calculates the present value of future cash flows and deducts the initial capital investment.


net present value (NPV)

Equals the present value (PV) of a capital investment
minus the initial amount of capital that is invested, or the entry cost
of the investment. A positive npv signals an attractive capital investment
opportunity; a negative npv means that the investment is substandard.


Net Present Value (NPV)

The present value of all future cash inflows minus the present value
of all cash outflows



net present value (NPV)

the difference between the present values of all cash inflows and outflows for an investment project


net present value (NPV)

Present value of cash flows minus initial investment.


NPV Image 2

Net Present Value (NPV) Method

A method of ranking investment proposals. npv is equal to the present value of the future returns, discounted at the marginal cost of capital, minus the present value of the cost of the investment.


NPV (net present value of cash flows)

Same as PV, but usually includes a subtraction for an initial cash outlay.


NPV profile

A graph of npv as a function of the discount rate.


Present value of growth opportunities (NPV)

Net present value of investments the firm is expected to make
in the future.


discounted cash flow (DCF)

Refers to a capital investment analysis technique
that discounts, or scales down, the future cash returns from an
investment based on the cost-of-capital rate for the business. In essence,
each future return is downsized to take into account the cost of capital
from the start of the investment until the future point in time when the
return is received. Present value (PV) is the amount resulting from discounting
the future returns. Present value is subtracted from the entry
cost of the investment to determine net present value (npv). The net
present value is positive if the present value is more than the entry cost,
which signals that the investment would earn more than the cost-ofcapital
rate. If the entry cost is more than the present value, the net
present value is negative, which means that the investment would earn
less than the business’s cost-of-capital rate.


Discretionary cash flow

Cash flow that is available after the funding of all positive npv capital investment
projects; it is available for paying cash dividends, repurchasing common stock, retiring debt, and so on.


Internal rate of return

Dollar-weighted rate of return. Discount rate at which net present value (npv)
investment is zero. The rate at which a bond's future cash flows, discounted back to today, equals its price.


internal rate of return (IRR)

Discount rate at which project npv = 0.


Net present value of future investments

The present value of the total sum of npvs expected to result from
all of the firm's future investments.


NPV Image 3

Net present value rule

An investment is worth making if it has a positive npv. Projects with negative npvs
should be rejected.


reinvestment assumption

an assumption made about the rates of return that will be earned by intermediate cash flows from a capital project; npv and PI assume reinvestment at the discount rate; IRR assumes reinvestment at the IRR



Separation theorem

The value of an investment to an individual is not dependent on consumption
preferences. All investors will want to accept or reject the same investment projects by using the npv rule,
regardless of personal preference.



 

 

 

 

 

 

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