Net present value
NPV discounts each incremental cash flow at a rate appropriate to its timing and risk, then adds the resulting present values. A positive NPV indicates value created above the required return under the stated assumptions; a negative NPV indicates value destroyed. For unconstrained independent projects, accept positive-NPV investments. For mutually exclusive alternatives, compare their NPVs on a consistent basis. NPV is a monetary amount, not a percentage, and includes all relevant cash flows. It remains dependent on forecast quality, the chosen discount rate and proper treatment of inflation and tax.
Worked example
A project costs $100,000 now and returns $60,000 at the end of each of years 1 and 2. At 10%, NPV = −100,000 + 60,000/1.10 + 60,000/1.10² = $4,132.23. The $4,132 is additional value after allowing for the 10% required return.
Common mistake
Subtracting interest payments in the cash flows and also discounting at a financing-inclusive required return, thereby counting financing twice.
Where it appears in your exams
| Qualification | Exam | Relationship | Period |
|---|---|---|---|
| ACCA | AFM | Direct | September 2026–June 2027 |
| ACCA | FM | Direct | September 2026–June 2027 |