Business – 10.3 Investment appraisal – Net present value (NPV) | e-Consult
10.3 Investment appraisal – Net present value (NPV) (1 questions)
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Net Present Value (NPV) measures the difference between the present value of cash inflows and the present value of cash outflows over a project's life, using a specified discount rate. It is calculated as:
NPV = Σ (Cₜ / (1 + r)ᵗ) – C₀
- Cₜ = cash flow in period t
- r = discount rate (cost of capital)
- C₀ = initial investment (cash outflow at t = 0)
A positive NPV means the project is expected to generate value above the cost of capital and should be accepted. A zero NPV indicates the project will break even, earning exactly the required return. A negative NPV suggests the project will destroy value and should be rejected.