Corporate Finance: Capital budgeting — Net Present Value (NPV)
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Analysts use a comprehensive set of measures to decide whether to accept or reject a project. The most important measures are net present value (NPV) and Internal Rate of Return (IRR) as complementary decision criteria.
- payback period
- Discounted payback period
- Average rate of return (ARR)
- Profitability index (P).
Net Present Value (NVP)
Net present value is a financial metric used to assess the profitability of an investment. The metric takes into account the time value of money, which essentially means that money today is more worth than money tomorrow.
See related article about “the time value of money”
Net Present Value (NPV) is used in capital budgeting to assessing the profitability of proposed investments.
Capital budgeting is the process of making decisions about whether or not to invest in long-term projects.
Read more about Capital budgeting in my previous article:
NPV is a helpful metric in capital budgeting because it takes into account the time value of money. That means that it considers the magnitude of cash flows and when they are expected to occur.
NPV is calculated by taking the present value of all cash flows associated with an investment and subtracting the initial investment amount.
