Finance - Net Present Value (NPV) - Example

When conducting cost-benefit analysis on a project or proposal, companies get a more accurate result by converting all future costs and benefits to their present values. Subtracting the present values of all costs from the present values of all benefits gives the company the net present value of the project, or NPV. If the NPV is positive, the benefits outweigh the costs, and the project will, over time, pay for itself and generate a profit. If the NPV is negative, the project will never pay for itself; it’s a moneylosing proposition. If a company ‘A’ is trying to decide among competing projects, each of which has a positive net present value, the one with the higher NPV will generate a greater return and add more value to company ‘A’.