NPV (Net Present Value) is one of the most important investment evaluation metrics in financial analysis. It discounts future cash flows to their present value using a specified discount rate, then subtracts the initial investment to determine the net value of a project.
NPV = -C₀ + Σ(Cₜ / (1+r)^t)
Where: C₀ = Initial investment, Cₜ = Cash flow at period t, r = Discount rate, t = Time period
NPV (Net Present Value) is the difference between the present value of cash inflows and outflows over a period of time. NPV greater than 0 indicates a profitable investment, NPV less than 0 indicates an unprofitable one, and NPV equal to 0 means the investment breaks even.
NPV = -C₀ + Σ(Cₜ / (1+r)^t), where C₀ is the initial investment, Cₜ is the cash flow at period t, r is the discount rate, and t is the time period. The discount rate reflects the time value of money and risk premium.
The discount rate is typically chosen as: 1) Weighted Average Cost of Capital (WACC); 2) Industry average return; 3) Bank loan rate plus risk premium; 4) Minimum required return by investors. Generally 8%-15% for normal projects, 15%+ for high-risk projects.
NPV gives the absolute value amount created by the investment, while IRR gives the percentage return rate. NPV is better for comparing projects of different scales, IRR is better for judging the return level of a single project. They are usually used together.
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