Net present value (NPV) is the difference between the present value of a time series of cash inflows and the present value of a time series of cash outflows (or initial investment and fees). Present value is calculated as follows:

PV = Income/(1 + discount rate)^t

• Income = i.e. rental income;
• Discount rate = rate of return for comparable alternative venture/opportunity cost of capital.
• t = year of the project.

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The sum of the present values, minus the initial investment and fees is the net present value. An NPV above zero will return more than the anticipated rate of return. An NPV at zero indicates a return at the anticipated amount and an NPV below zero indicates earnings below the anticipated rate of return.

A positive NPV may be an indication of a worthwhile investment.

Last Updated on January 10, 2013 by Ramin Seddiq