NPV — value of future cash flows in today's dollars.
Formula: NPV = Σ [Cash Flow / (1 + rate)^period]
Interpretation:
Example:
Project A:
Year 0: -$100,000
Year 1: +$40,000
Year 2: +$50,000
Year 3: +$60,000
Discount rate: 10%
NPV = -100,000 + 40,000/1.1 + 50,000/1.21 + 60,000/1.331
NPV = -100,000 + 36,364 + 41,322 + 45,075
NPV = $22,761
NPV > 0 → Invest
BA use: