Net Present Value Method

Widely used approach for evaluating an investment project. Under the net present value method, the present value (PV) of all cash inflows from the project is compared against the initial investment (I). The Net Present Value (NPV) which is the difference between the present value and the initial investment (i.e., NPV = PV - I ), determines whether the project is an acceptable investment. To compute the present value of cash inflows, a rate called the Cost of Capital is used for discounting. Under the method, if the net present value is positive (NPV > 0 or PV > I ), the project should be accepted.