What is NPV and why it is calculated

Question

Accepted Answer

NPV stands for Net Present Value. It is calculated to determine the present value of future cash flows.

NPV is used to evaluate the profitability of an investment or project.
It takes into account the time value of money and discounts future cash flows to their present value.
If the NPV is positive, the investment is considered profitable.
If the NPV is negative, the investment is considered unprofitable.
NPV is calculated using a discount rate, which represents the cost of capital or the required rate of return.
For example, if a company is considering investing in a new project that will generate cash flows of $10,000 per year for the next five years and the discount rate is 10%, the NPV would be calculated as follows: NPV = -$39,471. This means that the project is not profitable at the current discount rate.

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