NPV Explained: How to Value an Investment Using Discounted Cash Flow
September 22, 2026
NPV = −Initial Investment + Σ [Cash Flow / (1 + discount rate)^period]. It converts every future cash flow into today's dollars, then compares that total against what the investment costs upfront. Positive NPV means the investment is expected to add value; negative NPV means it's expected to cost more than it returns.
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Open the NPV Calculator →A Negative NPV Example
A $100,000 investment returns $40,000 per year for 3 years, discounted at 10%.
- Year 1: $40,000 / 1.10 = $36,364
- Year 2: $40,000 / 1.10² = $33,058
- Year 3: $40,000 / 1.10³ = $30,053
- Total present value: $99,474
- NPV = $99,474 − $100,000 = −$526
A Positive NPV Example
A $50,000 investment returns $20,000 per year for 4 years, discounted at 8%, has a total present value of $66,243 — giving an NPV of +$16,243. This investment clears its cost of capital with room to spare, unlike the first example, which fell just short.
Why the Discount Rate Changes Everything
The first example's NPV was only slightly negative (−$526 on a $100,000 investment) — at a 9% discount rate instead of 10%, the same cash flows produce a positive NPV of about +$1,257. Small changes in discount rate can flip the accept/reject decision entirely, which is why choosing the right rate (usually your WACC or required return) matters as much as the cash flow estimates themselves.
Why Discount at All?
A dollar received today can be invested and grow; a dollar received in three years cannot do that in the meantime. Discounting converts every future cash flow into its equivalent value today, accounting for both the time value of money and the opportunity cost of not having that money sooner.
Frequently Asked Questions
What does a negative NPV mean?
A negative NPV means the investment's future cash flows, discounted back to today, are worth less than what it costs upfront — at that discount rate, the investment is expected to destroy value rather than create it.
What discount rate should I use?
For a company evaluating a project, WACC is the standard choice. For an individual investor, use your required rate of return — the minimum return you'd need to justify taking on that investment's risk instead of an alternative.
Why did a small change in discount rate flip my NPV from negative to positive?
NPV is sensitive to the discount rate because it compounds over every period — an investment whose NPV sits close to zero at your chosen rate is especially sensitive to small rate changes, which is why testing a range of rates (sensitivity analysis) is common practice.
Can I use NPV to compare two different investment options?
Yes — calculate the NPV of each option using the same discount rate, and the option with the higher NPV is expected to create more value, assuming both carry comparable risk.
Is NPV the same as profit?
No — NPV already accounts for the time value of money and the cost of capital, so a positive NPV means the investment clears a higher bar than simple profit: it earned more than what an equivalent alternative investment (at the discount rate) would have.