The difference between the
present value of the future
cash flows from an
investment and the
amount of investment. Present value of the expected cash
flows is computed by
discounting them at the
required rate of return. For example, an investment of $1,000 today at 10
percent will
yield $1,100 at the end of the year; therefore, the present value of $1,100 at the desired
rate of
return (10 percent) is $1,000. The amount of investment ($1,000 in this example) is deducted from this figure to arrive at net present value which here is zero ($1,000-$1,000). A zero net present value
means the
project repays
originalinvestment
plus the required rate of return. A positive net present value means a better return, and a negative net present value ...
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