Net present value

The sum of every future cash flow discounted back to today at a chosen rate, less what must be paid now.

Example

Discounting a deal's five inflows at 11.446939% sums to exactly the 250,000 paid at the start, so the net present value at that rate is zero.

Important

It needs a rate you choose; an IRR is simply the rate at which it equals zero. Substituting a quoted IRR back into this calculation is the one check that does not rely on trusting whoever built the model.

Related terms

• Internal rate of return (IRR) — The single annual rate at which every cash flow, positive and negative, discounts back to exactly zero - the r solving sum of CF_t/(1+r)^t = 0.
• Present value — What an amount of money arriving in the future is worth today, once discounted at a chosen rate.
• Discount rate — The annual rate at which future money is reduced to a present value, reflecting both the time you wait and the risk that the money does not arrive.

Lessons that explain it

• IRR: the measure that knows about time, and what it assumes — IRR is the rate at which every cash flow discounts back to zero. It is the right tool for irregular timings, and it systematically flatters anything held briefly. (14 min)

All 578 terms in the Investing glossary