Net present value

The value a project adds, in money, once every cash flow has been discounted and the outlay subtracted. Denominated in what shareholders actually receive.

Where you will meet it

Net present value appears in 4 learning outcomes on the CFA syllabus. A few of them:

• Work out what one cash flow is worth today
  CFA Level I · Quantitative Methods

  “This is the single operation underneath bond pricing, net present value and every valuation model, which all reduce to discounting a set of future amounts and adding them up.”

• Work out a project's internal rate of return and net present value, and explain each
  CFA Level I · Corporate Issuers

  “Net present value discounts a project's incremental after-tax cash flows at the required rate and subtracts the outlay; a positive figure means the project adds that much value in today's terms.”

• Work out net present value and the internal rate of return
  CFA Level I · Quantitative Methods

  “Net present value discounts every cash flow of a project at the required return and subtracts the outlay, so a positive NPV means the project adds value at that required return.”

• Set out frequent mistakes in capital allocation and explain real options
  CFA Level I · Corporate Issuers

  “Real options sit on the other side of the ledger — the ability to expand, abandon, defer or switch inputs has value that a single-scenario NPV omits.”

Learn it properly

• NPV vs IRR: which capital budgeting rule to trust Guide
• NPV and IRR calculator Calculator

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with N · Glossary