Net present value (NPV)

Net present value (NPV)

Net present value (NPV) is a way to value an investment by converting all future cash inflows and outflows to today’s money using a chosen discount rate, then subtracting the initial cost. A positive NPV suggests the project adds value to your business; a negative NPV suggests it may not be worth doing.

Box illustration

Simple NPV illustration

Pay 1,000 today and receive 600 next year and 600 the year after. For illustration only, using a 10% discount rate, the present value ≈ 1,041, so NPV ≈ +41.

Pick a discount rate that reflects your required return and the risk of the cash flows. Be consistent in how you build the cash flows (for example pre‑tax or post‑tax), include all relevant costs such as working capital and asset disposals, and match the timing correctly.

NPV helps you make these decisions:

  • Accept or reject a project based on whether NPV is positive.
  • Compare different options with different timings of cash flows.
  • Run “what‑if” checks by changing the discount rate or cash flow assumptions.
  • Prioritise projects when your budget is limited.
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