What is the definition of Net Present Value (NPV)

Net Present Value (NPV) is a financial accounting term used to determine the value of money in the future at a value today. Money at some point in the future is usually worth less than money in the present so a discount rate has to be applied (usually a risk-free interest rate). More specifically, NPV is the difference between the present value of future cash flows and outflows and is used to determine the profitability of an investment. If the NPV is positive, the project is worth undertaking and vice versa.

Net Present Value is calculated by summing the cash flow divided by the interest rate in every future year and then subtracting the initial expenditure.