NPV - Net Present Value

Formal

‘Net Present Value’ - an investment appraisal technique that takes the minimum investment return required by companies and applies this percentage rate to the projected cash inflows and outflows from that project (See DCF). The answer is either positive or negative - positive is a surplus, based on today’s money values and therefore leads to project acceptance. A negative result effectively fails (in real terms) to deliver the required return.

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Straight Talk

Imagine your father will give you $100, but he wants it back in one year’s time with 10% interest. Your best friend has got this ‘sure thing’ and he will guarantee you $150 but only in one year’s time. So, if you take the loan, you can pay back the $110 and still be $40 ahead at the end of the year. That $40 is worth about $36 in today’s terms (10% interest rate). You have just made a ‘Positive Net Present Value’ of $36 by taking your father’s money today. Easy.

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