Net present value

Updated: Aug 20, 2021

A term used with particular reference to investment control. When a project is being considered, various devices are employed to discover whether it is profitable. One method is to take the projected value of expected net receipts for the years the plant will be productive. This is discounted back at a rate of interest consistent with the risk involved, to the date of investment. There will be a figure for each year. If the total of these figures exceeds the capital to be invested, the project may be profitable. Another similar method is to find the rate of interest that would produce the anticipated net income on the amount invested. The project is then assessed according to the adequacy of that interest rate. The first method is known as the net present value technique. The second is more appropriate where the income is concentrated at one point in the future. Both methods are in common use. There are also jj other more sophisticated techniques, but they are basically variations of these two, i.e. worked on the theory of compound interest.

Reference: The Penguin Business Dictionary , 3rd edt.

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