NPV Meaning and
Definition
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Net Present Value (NPV) is a financial metric used in capital budgeting and investment analysis to assess the profitability and viability of an investment project or business venture. It serves as a tool for determining the present value of projected cash flows that are expected to be generated by an investment and compares it to the initial investment cost.
NPV calculates the difference between the present value of expected cash inflows and outflows over a specified time period, usually the life of the project or investment. The cash flows are discounted using an appropriate discount rate to reflect the time value of money, which represents the opportunity cost of investing in one project instead of other investment alternatives.
A positive NPV indicates that the present value of projected cash inflows exceeds the initial investment outlay, implying that the project is financially viable and likely to generate value. Conversely, a negative NPV suggests that the investment is likely to result in a loss or generate less value than alternative investments. Zero NPV indicates that the present value of cash inflows is equal to the initial cost, signifying that the investment breaks even.
NPV is widely used by businesses, financial analysts, and investors to evaluate the feasibility and profitability of potential investments. It provides a comprehensive measure of an investment's value, considering both the magnitude and timing of expected cash flows and incorporating the concept of the time value of money.
Common Misspellings for NPV
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