NPV meaning
Net present value (NPV) is the sum of all future cash flows of a project or investment, each discounted back to today at a chosen rate, minus the amount paid today.
A positive NPV means the cash flows are worth more today than they cost at that discount rate. A negative NPV means they are worth less. An NPV of zero means the investment returns exactly the discount rate.
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NPV formula
Write the notation first:
- CF_t is the cash flow received in period t.
- r is the discount rate per period.
- G is the growth factor: what a single rupee grows to over a period at rate r (the rupee plus its interest).
- C is the outlay paid today.
Then:
NPV = Σ CF_t / G^t − C
The sum runs over every future period. Each CF_t / G^t is a present value: the money received later, expressed in today's rupees.
How to calculate NPV: a hypothetical case
Imagine a project that costs C today. It pays amount A next year and amount B the year after. Your discount rate is r per year.
- Find G for rate r.
- Divide A by G. That is the present value of next year's payment.
- Divide B by G twice (by G squared). That is the present value of the later payment.
- Add the two present values, then subtract C.
If the result is above zero, the project beats the rate r on paper. If it is below zero, it does not. To work with your own figures, use a spreadsheet's NPV function or the tools on the calculators page.
Where the term appears
- Company reports. Project appraisal, impairment tests and lease accounting all discount future cash flows. This is part of fundamental analysis.
- Bond pricing. A bond's price is the present value of its coupons and face value.
- Swaps and forwards. The mark-to-market value of a swap is the NPV of its remaining legs.
- News. Reports on government projects, loans and privatisations often cite NPV. Interest-rate news matters because discount rates move with the policy rate. For example: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC).
Edge cases for experienced readers
- Rate sensitivity. NPV changes a lot with r, especially for long-dated cash flows. A move of a few basis points can flip the sign of a marginal project.
- Spreadsheet timing. Spreadsheet NPV functions treat the earliest value in the range as arriving a full period from now. Add the outlay made today outside the function.
- Real vs nominal. Discount nominal cash flows at a nominal rate and inflation-adjusted cash flows at a real rate. Do not mix them.
- IRR link. The internal rate of return is the r at which NPV equals zero. If cash flows change sign more than once, there can be several IRRs. In that case NPV is the clearer measure.
- Risk. A single rate can hide uncertainty. Analysts often test several rates or scenarios.
- Scale. NPV is an absolute amount. Comparing projects of different sizes may also need annualized return or CAGR.
Related terms
Accrued interest, bond duration, amortization, forward points, covered interest parity, deflation. More entries are in the trading glossary and the saving, investing and loans section.
Frequent questions
Is a higher NPV always better?
At the same discount rate and similar risk, a higher NPV means more value in today's money. It says nothing about how likely the cash flows are to happen.
What discount rate should I use?
Usually the return you could earn elsewhere at similar risk, which is the cost of capital. The choice is a judgement, and the result depends on it.
What is the difference between NPV and present value?
Present value is the discounted worth of future cash flows. NPV subtracts the cost paid today from that present value.
Does NPV apply to leveraged trading?
Not directly. NPV is used for cash-flow investments such as projects and bonds. Leveraged CFD and forex positions have no fixed cash flows, and they can lose money fast.