What is NPV?
What is NPV?
NVP is a tool used to determine what the value of a future stream of cash flows would be today. The NPV is used to determine whether to take on new investment or project by accounting for the time value of money. How it works is future cash flows that derive from a project are laid out on a timeline. These cash flows are then discounted, by the discount rate, to time 0 (present). An investment with a positive NPV means that the project is profitable, and projects with a negative NPV should be avoided. A drawback of the NPV approach is that it makes assumptions about the future which might not always come true.
For more information on this topic, check out this article from our friends at Investopedia.