Definition
NPV is the present value of future cash flows minus initial cost. NPV helps compare projects and investments.
Formula
NPV = sum cash_flow_t / (1 + r)^t - initial investment
Example
If PV of future cash flows is $140k and the upfront investment is $100k, NPV = $40k (value created at the chosen discount rate).
How to use it
- Use NPV as the primary decision metric when you have a sensible discount rate (MARR).
- Compare projects on NPV for absolute value created; use PI for value per dollar under capital constraints.
Common mistakes
- Using an arbitrary discount rate (NPV is only as good as r).
- Comparing NPVs across projects with very different risk without adjusting the discount rate.
Why this matters
This term matters because cash timing and risk are usually the difference between a plan that works on paper and a plan that survives. Use consistent definitions so decisions are comparable over time.
Practical checklist
- Write a 1-line definition for "NPV (Net Present Value)" that your team will use consistently.
- Keep the time window consistent (weekly/monthly/quarterly) when comparing trends.
- Segment results (channel/plan/cohort) before drawing big conclusions from blended averages.
- Use a calculator that references this term (e.g., NPV Calculator) to sanity-check assumptions.
- Read the related guide (e.g., NPV (Net Present Value): definition, formula, and example) for context and common pitfalls.
Where to use this on MetricKit
Calculators
- NPV Calculator: Calculate net present value (NPV) from initial investment, annual cash flow, years, and discount rate.
- Investment Decision Calculator: Evaluate an investment using NPV, IRR, discounted payback, and profitability index from simple cash flow assumptions.
- IRR Calculator: Estimate internal rate of return (IRR) for an investment using yearly cash flows.
- Discounted Payback Period Calculator: Estimate discounted payback period using a discount rate (and compare to simple payback).
- DCF Valuation Calculator: Estimate enterprise value using a simple DCF: forecast cash flows, apply a discount rate (often WACC), and add a terminal value.
Guides
- NPV (Net Present Value): definition, formula, and example: NPV explained: what net present value means, how to calculate NPV, how to pick a discount rate (MARR), and common pitfalls.
- Investment decision metrics: NPV vs IRR vs payback vs PI: A practical guide to investment decision metrics: when to use NPV, when IRR misleads, and how payback and profitability index fit in.
- Capital budgeting hub: NPV, IRR, payback, and investment decisions: A practical hub for capital budgeting: use NPV, IRR, discounted payback, and profitability index together (and avoid relying on a single metric).
- IRR (Internal Rate of Return): definition, formula, and how to use it: IRR explained: what internal rate of return means, how to calculate IRR, and when IRR can be misleading (use NPV too).
- Discounted payback period: definition, formula, and how to calculate: Discounted payback explained: how it differs from simple payback, the formula, and when discounted payback is the right metric.