What Is Net Present Value (NPV)

The Logic Behind Every Capital Request and Investment Decision.

If you spend a dollar today, is it still worth a dollar next year? Not quite. Even without inflation a dollar today can be invested, saved, or used to avoid borrowing. That means it’s worth more than a dollar you’ll get sometime in the future.

That simple idea is what drives Net Present Value, or NPV. It's the idea that money today is worth more than the same amount in the future because prices rise and opportunities change.

When businesses look at investment, they look at it this way: a dollar today is worth more than a dollar next year. The dollar today can be invested, saved, or used to avoid borrowing. That means it’s worth more than a dollar you’ll get sometime in the future.

The Idea in One Line

NPV tells you whether the money coming back from an investment is worth more or less than the money you spend now.

• If the result is positive, the project adds value.
• If it’s negative, the project loses value.

That’s it.

How It Works

Imagine you invest $100,000 today and you expect to earn $25,000 each year for the next five years.

But those future dollars aren’t equal to today’s dollars — so you “discount” them back to today’s value using a discount rate, often somewhere between 5% and 10%.
That rate represents what your company could earn by putting the same money elsewhere — its expected return or cost of capital.

Let’s use 8% as the discount rate.

Here’s what each year’s $25,000 is worth in today’s dollars:

Compare the present value of future cash flows $100,180 to your initial investment of $100,000:

NPV = $100,180 – $100,000 = +$180

That small positive number means the project barely creates value at an 8% return. If the rate were a little higher, it would turn negative — a reminder that timing, assumptions, and opportunity cost all matter.

The math isn’t complicated, but the thinking behind it is powerful: NPV shows whether an idea creates or consumes value once time and opportunity cost are taken into account.

Why Businesses Use It

Companies almost always have more good ideas than money to fund them. So they use NPV to rank projects competing for limited capital — from factory upgrades to product launches to process improvements.

It’s a way to see which projects create the most value for the money invested. That’s why understanding NPV isn’t just for finance people. It’s for anyone proposing an initiative that requires funding.

What NPV Doesn’t Tell You

NPV can’t see everything. It doesn’t capture strategic importance, safety requirements, or cultural impact. Fixing a leaking roof might have a negative NPV and still be essential.

And a positive NPV doesn’t mean you personally will see that cash — it’s a tool for comparing alternatives, not a promise of profit.

The Takeaway

NPV translates future hopes into today’s dollars. It’s how businesses compare choices on equal terms and decide where to invest for the greatest return.

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Try the NPV exercise.

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