Valuation and investment
Net present value (NPV)
Today's value of all future cash flows, minus the upfront investment.
Facts checked against sources onWhat does Net present value (NPV) mean?
Net present value discounts every future cash flow from a decision back to today at the cost of capital, adds them up, and subtracts the upfront investment. If NPV is positive, the project earns more than the cost of capital and creates value. Example at a 10% rate: invest 100 today to receive 60 in each of the next two years. The present values are about 54.5 and 49.6, which add up to about 104.1, so NPV is about 4.1.
Where does it come up in case interview prep?
- Valuation in practice: multiples, a simple DCF, NPV, IRR and paybackLesson in Reading a business through its numbers: the three statements, cash and value
- Using this in a case: what to ask, what to calculate, what to sayLesson in Reading a business through its numbers: the three statements, cash and value
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- Judging an investment: payback, ROI, and present valueLesson in Case math and quantitative reasoning
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Related terms
- Discount rate and hurdle rateThe rate used to turn future cash into today's value.
- IRR (internal rate of return)The discount rate at which NPV is exactly zero.
- DCF (discounted cash flow)Valuing a business from the future cash it will generate.
- Time value of moneyMoney today is worth more than the same money later.
- Return on investment (ROI)The gain from an investment relative to its cost.
- Payback periodHow long until an investment earns back its cost.
- Cost of capital (WACC)The return a company must earn to satisfy its lenders and owners.
- Enterprise value (EV) and EV/EBITDAThe value of the whole business, to lenders and owners together.
Learn it in context
See Net present value (NPV) at work in a lesson from Reading a business through its numbers: the three statements, cash and value, with checks as you go.
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