Present Value (PV) vs. Net Present Value (NPV): What’s the Difference?

Updated November 05, 2024

Reviewed by

Fact checked by

Man in trading room evaluating trends of an asset on a big screen — Getty Images / Monty Rakusen

Present Value (PV) vs. Net Present🉐 Value (NPV): An Overview

澳洲幸运5开奖号码历史查询:Present value (PV) is the current value of a future sum of money or stream of cash flow given a specified rate of return. Meanwhile, 澳洲幸运5开奖号码历史查询:net present value (NPV) is the difference between the PV of cash inflows and the PV of cash outflows over a period of time.

PV tells you what you’d need in today’s dollars to earn a specific amount in the future, while NPV is used to determine how profitable a project or an investment may be. Both can be important to an individual’s or a company’s decision-making concerning investments or 澳洲幸运5开奖号码历史查询:capital budgeting.

While PV and NPV both use a form of澳洲幸运5开奖号码历史查询: discounted cash flows (DCF) to estimate the current value of future income, these calculations differ in an important way. The NPV formula also accounts foꦑr the initial capital outlay required to fund a project, which is why it is a net figure. This additional variable makes it a more comprehensive indicator of potential profitabilit𓄧y.

The value of revenue earned today is higher than that of revenue earned at a later date because of its 澳洲幸运5开奖号码历史查询:earning potential during the time period separating the two. This is a concept known as the “澳洲幸运5开奖号码历史查询:time value of money.” Thus, businesses discount future income by the investment’s expected rate of return. This rate, called the “澳洲幸运5开奖号码历史查询:hurdle rate,” is the minimum rate of return a project must generate for the business to consider investing in it.

Key Takeaways

Present value (PV) is the current value of a future sum of money that’s discounted by a rate of return.
PV tells you the amount you’d need to invest today in order to earn a specific amount in the future.
Net present value (NPV) is the difference between the PV of cash inflows and outflows over a period of time.
Both PV and NPV use discounted cash flows to estimate the current value of income.
NPV also accounts for the initial outlay required to fund a project.

PV

The PV calculat♚ion takes a future amount o꧃f cash and discounts it back to the present day. The formula for this is:

PV = FV ÷ (1 + r)ⁿ

▨where FV is the future value, r is the required rate of return, and n is the number of t💫ime periods.

NPV

Tꦿhe NPV calculation takes the current value of future cash inflows and subtracts from it the current value of cash outflows. The formula for this is:

NPV = cash flow ÷ (1+i)^t− initial investment (where "i" is the required rate of return and "t" is the number of time periods)

Key Differences

	PV	NPV
Definition	The current value of a future sum of money discounted by a specified rate of return	The difference between the PV of cash inflows and the PV of cash outflows over time
Focus	Accounts for cash inflows only	Accounts for cash inflows and cash outflows that fund a project
Used By	Individuals and companies	Mainly companies
Purpose	Helps investors understand whether an investment or expenditure is sensible	Helps companies determine the potential profitability of projects; essential for capital budgeting

Examples

PV

Say that you can either receive $3,200 today and🥀 invest it at a rate of 4% or take a lump sum of $3,500 in a year. Calculating the PV of $3,500 can help y൲ou make a choice.

PV = FV ÷ (1 + r)ⁿ

PV = $3,500 ÷ (1 + .04)¹

PV = $3,365.39

This means you’d need to invest $3,365.39 today at 4% to get $3,500 a year later. The $3,200 today will result in a smaller return. Based on this you may feel that the lump sum in a year looks more attractive.

NPV

Say that company XYZ is considering investing in a potential project. It 澳洲幸运5开奖号码历史查询:requires an initial investment of $10,000 and off♑ers a future cash flow of $14,000 in a year. The required rate of return is 6%. We’ll calculate the NPV using a simplified version of the formula shown previously.

NPV = today’s value of expected cash flows - today’s value of cash invested

NPV = $13,208 (PV) - $10,000

NPV = $3,208

The NPV is $3,208, which suggests project profitability, 澳洲幸运5开奖号码历史查询:though it is not in and of itself definitiℱve. XYZ will also look at other metrics before deciding whether or not to pursue the project.

What Does NPV Indicate?

NPV indicates the potential profit that could be generated by a project or an investment. A positive NPV means that a project is earning more than the discount rate and may b🍷e financially viable.

Is a Higher NPV Better?

A projec🧔t or an investment with a higher NPV is typically considered more attractive than one with a lower or negative NPV. Bear in mind, though, that companies normally looꦜk at other metrics as well before a final decision on a go-ahead is made.

Is PV or NPV More Important for Capital Budgeting?

NPV is the more important of the two for capital budgeti🍰ng. This is because it accounts for both the PV and the costs required to fund a project, allowing it to provide a more informed view of project feasibility. This, in turn, informs capital budgeting.

The Bottom Line

While PV is useful, NPV is invaluable to capital budgeting. A project with a high PV may actually have a much less impressive NPV if a large amount ofꦇ capital is required to fund it. As a business expands, it looks to finance only those projects or investments that yield the greatest returns and thus enable growth. Given a number of potential options, the project or investment with the hi🍌ghest NPV is generally pursued.

Article Sources

Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.