NPV (Net Present Value / VAN)

Q: What does a positive NPV mean?

A positive NPV means the project creates value after accounting for time and risk.

Q: How do I choose the discount rate?

The discount rate should reflect risk and the minimum acceptable return.

Q: Is NPV better than IRR?

NPV gives a value in currency, while IRR gives a percentage. They are complementary.

NPV helps answer a deeper question than simple profitability: is this project really worth it today, once time and risk are taken into account? Because money received in the future is not equal to money today.

In short: NPV (Net Present Value), also called VAN in French, measures the value created by a project by discounting future cash flows to today and comparing them to the initial investment. On this page, you’ll find: definition, formula, example, interpretation, common mistakes, real-world use cases, and access to an NPV calculator.

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What is NPV? NPV formula Example Interpretation Use cases NPV FAQ

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What is NPV?

NPV (Net Present Value) measures how much value a project creates by converting future cash flows into today’s value using a discount rate.

It is widely used in finance, investment analysis, corporate projects and real estate, because it forces decisions to account for time, risk and opportunity cost.

Decision rule:
• NPV > 0 → value is created
• NPV = 0 → break-even project
• NPV < 0 → value is destroyed

NPV formula

The standard NPV formula is:

NPV = Σ [ CF(t) / (1 + r)^t ] − Initial Investment

Where:
• CF(t): cash flow at period t
• r: discount rate
• t: time period (usually years)
• Initial investment: upfront cost

Simple NPV example

You invest $1,000 today. You expect $500 per year for 3 years. Your discount rate is 10%.

PV = 500/1.1 + 500/1.1² + 500/1.1³ ≈ 1,243
NPV = 1,243 − 1,000 = +243

The NPV is positive: the project creates value at a 10% required return.

How to interpret NPV correctly

NPV depends on the discount rate

A project can look attractive at 8% and unattractive at 15%. That’s not a flaw — it reflects different risk and return expectations.

NPV vs ROI

ROI shows overall profitability. NPV goes deeper by accounting for timing and risk. For long-term projects, NPV is often more reliable.

Common mistakes

Using an arbitrary discount rate
Ignoring maintenance or indirect costs
Mixing time periods
Using revenue instead of net cash flows

Key idea: NPV does not predict the future — it forces you to be honest about your assumptions.

NPV in real-world decisions

NPV is used for investment analysis, real estate, capital budgeting, project selection, and long-term strategic decisions.

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Typical searches:
• NPV project calculation
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FAQ – NPV

What does a positive NPV mean?

It means the project creates value after accounting for time and risk.

How do I choose the discount rate?

It should reflect risk and your minimum acceptable return.

Is NPV better than IRR?

NPV gives value in currency. IRR gives a percentage. They are complementary.

If you want to make decisions based on value — not intuition — NPV is one of the most reliable tools available.

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