Definition
Net Present Value (NPV) of the sum of all cash inflows (in Present Value) of the project minus the initial cost, i.e. PV (benefits) – PV (costs) (Read more)
NPV is an effective tool to help determining whether a project will be profitable,
- NPV > 0 – the project is profitable
- NPV = 0 – the project will break even
- NPV < 0 – the project will lose money
Sample Question
For the software project, $100,000 would be needed which is expected to generate a total of $200,000 (in present value) over 5 years. What is the Net Present Value (NPV) of the project?
A. $100,000
B. $200,000
C. $300,000
D. -$100,000
Solution: A
Since the Net Present Value (NPV) is the present value of all benefits minus all costs, i.e. NPV = $200,000 – $100,000 = $100,000.
Higher the better
The larger the Net Present Value (NPV), the more profitable the project is to the organization.
Check more articles on Cost Management
