What is net present value (NPV)?

Net Present Value (NPV) is a financial indicator used to assess the profitability of an investment project or business. NPV represents the difference between the sum of discounted future cash flows (i.e., cash flows adjusted to their present value) and the initial cost of the investment.

NPV is calculated by summing all the discounted future cash flows of a project. These cash flows are said to be discounted because one euro today is not equivalent to one euro tomorrow (inflation or deflation). The discount rate used to discount future cash flows (positive or negative) is determined based on the source of the initial investment (equity, bank financing, or other). A positive NPV indicates that the investment will be profitable.

Put another way, NPV allows us to measure how much an investment or project will yield by taking into account the time value of money, that is to say, money received today is worth more than the same amount received at a later date due to factors such as inflation and alternative investment opportunities.