NPV (Net Present Value)
The sum of a project’s cash flows, each discounted back to today, minus the initial outlay: the dollar value the project adds at a given discount rate.
NPV discounts every future cash flow to today’s dollars at a chosen rate and adds them up, including the initial outlay as a negative cash flow. A positive NPV means the project is expected to create more value than the capital costs, and a negative NPV means it destroys value at that rate.
NPV is considered more reliable than IRR for choosing between projects of different sizes or comparing mutually exclusive options, because it measures dollars created rather than a percentage return, and it always has a single answer for a given discount rate.
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