Calculating the net present value (NPV) involves determining the present value of a project’s cash flows to assess its financial viability. For example, when deciding on a capital investment, companies compute the NPV to evaluate its potential profitability.
Understanding NPV is crucial for making sound investment decisions, maximizing returns, and mitigating risks. Its historical origins lie in the discounted cash flow (DCF) method, which considers the time value of money and allows for comparisons across different investment options.