NPV

Net Present Value (or Net Present Worth)

In standard economics, money in the future is worth a bit less than money in your hand today. This is a codification of the saying "a bird in the hand is worth two in the bush". In economic terms we say that future money is 'discounted' at a certain rate. So for example we might say I'd be just as happy to have 1000 today or 2000 in a year's time: that's a discount of 100% per annum. What rate you choose for the discount rate depends on what you were planning to do with the money. Using this technique you can look at any future event where you receive money at a given point in time, and calculate what it is equivalent to in today's money.

Thus if you look at a series of positive cash flows delivered in the future (such as a customer paying you $30 a month for the next 20 months) you can discount each payment accordingly, and end up with a single value in "today's money", which will be somewhat smaller than $30 times 20 months, and which is referred to as the 'Net Present Value' of that money.

← Niche market null product → ↑ Glossary

 

 

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