Glossary

Net Present Value (NPV) is a financial metric used to determine the profitability and feasibility of an investment or project.

It calculates the difference between the present value of cash inflows and the present value of cash outflows over the life of the investment. A positive NPV indicates that the investment is expected to generate more money than it costs, while a negative NPV suggests a net loss. NPV is widely used in capital budgeting and investment analysis. 💵

For example, imagine a project that requires a $10,000 initial investment and is expected to generate $4,000 in annual cash flow for four years. Assuming a 10% discount rate, the NPV would be calculated as follows:

NPV = ($4,000 / 1.1) + ($4,000 / 1.1^2) + ($4,000 / 1.1^3) + ($4,000 / 1.1^4) - $10,000

Fun fact: The concept of NPV was first introduced by an economist named Irving Fisher in the early 20th century. He believed that the time value of money should be considered when evaluating investments, paving the way for modern investment analysis techniques. ⏳