10.3.3—NPV

Net present value subtracts the initial investment from the present value of expected future cash inflows and outflows, using a discount rate that reflects time and risk.

Money received later is not equivalent to money received now. NPV recognises timing and can compare projects whose cash flows arrive at different times, provided assumptions are credible.

A project with a large cash inflow in year five may have a lower present value than its undiscounted total suggests; changing the discount rate can change the ranking.

NPV is only as reliable as the cash-flow and discount-rate assumptions, and a positive NPV is not a guarantee.