Financial term · Reviewed August 17, 2026
Net present value
Net present value: The sum of future cash flows discounted to today, less the initial outlay. A positive figure indicates the flows exceed the required return at the chosen discount rate. The Present Value Calculator returns this figure from present value = future value ÷ (1 + discount rate)^years. At that calculator’s documented worked-example inputs the present value needed is $55,839; holding every other input steady, moving annual discount rate from 4.0% to 8.0% moves it from $46,319 to $67,556, a spread of $21,237.
NPV answers in money, not in a rate. How much value does this add, at the return I require. That makes projects of different sizes directly comparable in a way IRR does not, since a spectacular percentage on a tiny outlay can be worth less than a modest one on a large project.
| Term | Net present value |
|---|---|
| Category | Investing & Returns |
| How it is found | Present value = future value ÷ (1 + discount rate)^years |
| Worked example | Present value needed: $55,839 |
| Computed by | Present Value Calculator |
| Related terms | 8 defined in this glossary |
Before you rely on it
What to check
Test it at more than one discount rate.
The common error
Where people go wrong with net present value
Accepting a project positive only at an optimistic rate. That is a bet on the assumption, not on the cash flows, and it should be argued as one.
Worked through
Net present value in plain numbers
A project costs $10,000 today and returns $4,000 a year for three years. Discount at 8%. The three payments are worth $3,704, $3,429 and $3,175 today, a total of $10,308. NPV is $10,308 − $10,000, or +$308. Positive, so the project earns more than 8%. Change the discount rate to 10% and the present value of the inflows is about $9,947, giving an NPV of about −$53. Negative, so it fails at that hurdle. The same cash flows can pass or fail depending on the return you require, which is why the rate has to be chosen with care.
Easily confused
Net present value and its neighbours
NPV is not IRR and not payback period. IRR is the rate at which NPV is zero. NPV gives the value created in dollars at a chosen discount rate, so it works for ranking mutually exclusive projects. Payback ignores cash flows after recovery and the time value of money. Profitability index divides present value by cost. NPV also differs from accounting profit, which depends on accruals and depreciation. Decision rules are simple: accept when NPV is positive, if the inputs are believable.
In real decisions
Where net present value turns up
Companies use NPV to approve investments in equipment, expansions and acquisitions. Individuals use it to compare a lump sum with payments over time, to decide whether to pay points on a mortgage and to evaluate an education investment. Governments use it in cost-benefit analysis; a spreadsheet computes it with one function; the discipline of listing cash flows by date is often worth as much as the result.
Know the edges
Where net present value stops being reliable
Results depend on forecasts of cash flows and on the discount rate, and both are uncertain; small changes can flip a decision. Long-lived projects are especially sensitive. NPV does not capture flexibility, such as the option to expand or abandon, and use scenarios and sensitivity tests, and treat the number as a structured way to think rather than a verdict.
Quick answers
What people ask about net present value
What does a positive NPV mean? The project earns more than the discount rate, so it is expected to add value. A negative NPV means it earns less.
What discount rate should I use? The return you could earn on an alternative of similar risk. Companies often use their cost of capital. Test more than one.
Can NPV rank projects of different sizes? It gives the dollar value added, so a large project can beat a small one with a higher rate of return. Use the profitability index when capital is limited.
Put it to work
How net present value is calculated
At the present value calculator’s worked-example inputs, present value needed is $55,839, implied growth is $44,161. Moving annual discount rate from 4.0% to 8.0% moves that first figure from $46,319 to $67,556.
Open the Present Value Calculator →
Returns are hypothetical, may be negative and do not include every fee, tax or market risk.
Related vocabulary
Terms used alongside this one
Keep reading
Nearby in the glossary
- ← Net operating income (NOI)
- Net revenue retention →
- All 174 defined termsThe complete Free Calculators Online financial glossary.