What is NPV in projects?

NPV (Net Present Value) is a financial indicator that reflects the difference between the current value of cash inflows and outflows of a project, discounted to today.

In simple terms, NPV shows how profitable a project is considering time and the cost of money: if NPV is positive, the project is profitable; if negative, it incurs a loss.

To calculate NPV:

• Determine all expected cash flows (revenues and expenses) over the years.
• Choose a discount rate (considering risk and alternative costs).
• Discount all future flows to the present using the discounting formula.
• Sum the discounted flows.

Formula:

[ NPV = \sum_{t=0}^{n} \frac{C_t}{(1+r)^t} ]

where:

• (C_t) — cash flow in period t,
• (r) — discount rate,
• (n) — number of periods.

NPV helps in making decisions about launching, continuing, or terminating projects by evaluating their economic efficiency.