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Net Present Value (NPV) is a financial metric used to evaluate the profitability of an investment or project. It represents the difference between the present value of cash inflows and outflows.

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Calculating net present value...

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References & Resources

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The Importance of NPV

A positive NPV indicates that the projected earnings (in today's dollars) exceed the anticipated costs, meaning the investment should be profitable.

Understanding the Formula:

NPV accounts for the "Time Value of Money" by discounting future cash flows back to their present value using a specific **Discount Rate** (usually your cost of capital or desired rate of return).

The Decision Rule:

  • NPV > 0: Accept the project. It adds value to the firm.
  • NPV < 0: Reject the project. It will result in a net loss.
  • NPV = 0: Indifferent. The project breaks even.

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