Understanding Net Present Value (NPV) — The Beginner’s Guide to Smarter
Investments
Objective:
By the end of this lesson, you will understand:
The concept of Net Present Value (NPV
How to calculate NPV with a step-by-step formula
Why businesses use NPV for decision-making
What is NPV?
Net Present Value (NPV) measures the value of money over time by comparing the value of
cash inflows to the initial investment. A positive NPV indicates a profitable investment, while a
negative NPV suggests a loss.
💡 Formula:
Where:
= Net cash inflow during the period
= Discount rate
= Number of time periods
= Initial investment
Example:
You invest $10,000 in a project with expected cash inflows:
YEAR CASH FLOW
1 3,000
2 4,000
3 5,000
Discount rate = 10%
Investments
Objective:
By the end of this lesson, you will understand:
The concept of Net Present Value (NPV
How to calculate NPV with a step-by-step formula
Why businesses use NPV for decision-making
What is NPV?
Net Present Value (NPV) measures the value of money over time by comparing the value of
cash inflows to the initial investment. A positive NPV indicates a profitable investment, while a
negative NPV suggests a loss.
💡 Formula:
Where:
= Net cash inflow during the period
= Discount rate
= Number of time periods
= Initial investment
Example:
You invest $10,000 in a project with expected cash inflows:
YEAR CASH FLOW
1 3,000
2 4,000
3 5,000
Discount rate = 10%
