Define Net Present Value (NPV)?

Net Present Value (NPV) is a financial metric used to evaluate the profitability of an investment or project. It represents the difference between the present value of cash inflows and the present value of cash outflows over a specific time period. The present value is calculated by discounting future cash flows using a chosen discount rate, often the required rate of return or cost of capital. A positive NPV indicates that the projected earnings exceed the costs, making the investment potentially profitable. A negative NPV suggests a loss. NPV helps investors and businesses make informed decisions by considering both the value of future money and the associated risks with an investment or financial decision.