Net Present Value Method (NPV)

1. The net present value method is a capital budgeting method that measures cash inflows and cash outflows of an investment at a single point in time by incorporating the time value of money and discounting each of the cash flows to that single point in time. One discount rate or different discount rates to reflect risk or inflation may be used. If the net present value is greater than zero (which means that the investment will at least earn the hurdle rate of return), the investment should be accepted; if the net present value is less than zero (which means that the investment will not earn the hurdle rate of return), the investment should not be accepted. See also internal rate of return method and hurdle rate of return. The difference between the present value of all cash inflows from a project or investment and the present value of all cash outflows required to obtain the investment, or to undertake the project at a given discount rate.