What is Net Present Value (NPV)?

Net present value (NPV) is a measurement of cash flows over a specific time period that is often used to determine profitable budgeting strategies and capital allocations for different investment types. NPV is calculated by comparing variations between cash inflows and cash outflows. NPV takes into consideration the time needed to create money, comparing an initial amount of cash spent to the present value of return. Further, NPV often makes use of four main metrics including time, present value, future value, and discount rate to determine if an investment return is positive or negative.