Difference between the present value (PV) of the future cash flows from an investment and the amount of investment. Present value of the expected cash flows is computed by discounting them at the required rate of return (also called minimum rate of return). For example, an investment of $1,000 today at 10 percent will yield $1,100 at the end of the year; therefore, the present value of $1,100 at the desired rate of return (10 percent) is $1,000. The amount of investment ($1,000 in this example) is deducted from this figure to arrive at NPV which here is zero ($1,000-$1,000).

Alternatively, a method to evaluate comparable investments in very dissimilar projects by discounting the current and projected future cash inflows and outflows back to the present value based on the discount rate, or cost of capital, of the firm.

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