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Simple English definitions for legal terms
net present value
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A quick definition of net present value:
Net Present Value: Net present value is a way to figure out if a project or investment is worth doing. It looks at how much money you will make in the future and how much it will cost you to do the project or investment. Then it calculates how much money you would have today if you took into account the cost of borrowing money. This helps you decide if the project or investment is worth doing.
A more thorough explanation:
Definition: Net present value (NPV) is the present value of net cash flow from a project, discounted by the cost of capital. This value is used to evaluate the project's investment potential.
For example, if a company is considering investing in a new project that will cost $10,000 and is expected to generate $12,000 in cash flow over the next five years, the NPV would be calculated by discounting the future cash flows back to their present value using the company's cost of capital. If the NPV is positive, the project is considered a good investment.
The concept of NPV is important in finance because it helps investors and companies determine whether a project or investment is worth pursuing. By calculating the present value of future cash flows and comparing it to the cost of the investment, investors can make informed decisions about where to allocate their resources.