Net present value is used in capital budgeting and investment planning so that the profitability of a project or investment can be analyzed. This is important because it factors in the time value of money and the associated interest and opportunity costs.
Savvy investors and company management will use some form of present value or discounted cash flow calculation like NPV when making important investment decisions.
For more analysis on net present value, how it compares to other investment appraisal methods, and details on how the NPV formula is derived, please read our article on net present value.
You can also use our free NPV calculator to calculate the net present value of up to 10 cash flows.