NPV
Net Present Value — the sum of an investment's future cash flows discounted to today at the cost of capital, minus the initial outlay. Positive NPV means the project earns more than its capital costs and creates value; negative NPV destroys value. NPV is the theoretically correct decision rule for capital allocation: when comparing options, take the highest positive NPV, not the highest IRR. Mechanically, NPV is just per-period discounting summed across an uneven cash-flow stream: NPV = −Initial + Σ CFₜ/(1+r)ᵗ for each year t. This is the engine under every DCF valuation; the same arithmetic that prices a project also prices a business or a stock.
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Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
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