What is Net Present Value?
Net Present Value [or "NPV"],also called the net present value (NPV) and sometimes net present worth (NPW) is a way to value a series of cash flows at future times relating to the present .Incoming and outgoing cash can be evaluated.NPV is defined as the sum of the present values (PVs) of the individual cash flows of the same source.
If all future cash flows are incoming (such as the coupons [payments from] and principal of a bond) and the only outflow of cash is the original purchase price, the NPV is simply the PV of future cash flows minus the purchase price (which is its own PV). NPV is the predominant tool in discounted cash flow (DCF) analysis, and is a standard method for using the time value of money to appraise the merits of long-term projects and investments.NPV is widely used for capital budgeting in almost all businesses, and very common in economics, finance, and accounting.It measures the true cost of an investment by evaluating the excess or shortfall of cash flows, in present value terms, once financing or other imputed charges are included that would be relevant to the investment being evaluated.
NPV can be looked at as the “Difference Amount” between the sums of discounted; cash inflows and cash outflows. It compares the present value of money today to the present value of money in future, taking inflation and returns into account.
The NPV of a sequence of cash flows takes as input the cash flows and a discount rate or discount curve and outputs a price; the converse process in DCF analysis - this is done by taking a sequence of cash flows and a price as input and inferring as output a discount rate (the discount rate which would yield the given price as NPV) - is called the yield, and is more widely used in bond trading.
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