Net present value

Refers to the present value of a future stream of payments or cash-flow arising from a current asset or investment. Thus each future payment is ‘discounted’ back to the present using an assumed interest rate; the net present value is the sum of all discounted future cash-flows plus the value of the asset. In a simple example, a dollar received in a year’s time is worth less than a dollar held today, by the assumed interest rate. That is, if the one year interest rate is 10%, the value today of a dollar received in a year’s time is given as:

NPV of USD1 in a year’s time = USD1/(1.10) = USD0.909