Net present value (or NPV) or discounted value measures the value of a stream of future cash flows after accounting for the time value of money.^{[1]}

Purpose

Net present value—along with payback and internal rate of return—is one of three metrics commonly used to evaluate return on investment over multiple periods. The purpose of the NPV metric is to summarize the value of cash flows over multiple periods. NPV accounts for the fact that on a per-dollar basis, cash flows received in the future are less valuable than cash in hand.

Construction

Net present value ($): The present (discounted) value of future cash inflows minus the present value of the investment and any associated future cash outflows

Where Cis the value of future cash flows, nis the number of periods invested, and iis the discount rate for one period. The discount rate used is the vital consideration and should account for the risk of investment too.

The figure above shows that a 10% discount rate applied to $1 received now and in each of the next three years reduces in value over time.

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## Net Present Value

## Definition

Net present value(orNPV) ordiscounted valuemeasures the value of a stream of future cash flows after accounting for the time value of money.^{[1]}## Purpose

Net present value—along with payback and internal rate of return—is one of three metrics commonly used to evaluate return on investment over multiple periods. The purpose of the NPV metric is to summarize the value of cash flows over multiple periods. NPV accounts for the fact that on a per-dollar basis, cash flows received in the future are less valuable than cash in hand.## Construction

Net present value ($):The present (discounted) value of future cash inflows minus the present value of the investment and any associated future cash outflowsWhere

Cis the value of future cash flows,is the number of periods invested, andnis the discount rate for one period. The discount rate used is the vital consideration and should account for the risk of investment too.iThe figure above shows that a 10% discount rate applied to $1 received now and in each of the next three years reduces in value over time.## References

Marketing Metrics: The Definitive Guide to Measuring Marketing Performance (Second Edition).Upper Saddle River, New Jersey: Pearson Education, Inc. <http://www.amazon.com/Marketing-Metrics-Definitive-Measuring-Performance/dp/0137058292>We welcome comments that will help us improve the precision and clarity of our definitions. To submit a suggestion, please click on the

Add Discussionbar below.Notes:Comments are limited to registered users of this site. Click “Join” at the top right hand side of this page to apply.If you would like to suggest a new marketing definition or have a general comment, please visit our home page.