The Net Present Value or NPV is a formula used to calculate the profitability of an investment. The initial expense will mean a negative cash flow. As the money that is going out is subtracted from the money coming in over the period of investment, the NPV must be positive for the investment to be valuable.
For example…
Rita is investigating whether it will be a profitable investment for her cafe to go organic. She estimates her initial investment to be around twenty-five thousand dollars. Over a period of three years, she expects the cash flow to be twenty, fifteen and twenty thousand dollars respectively. At a discount rate of ten percent, the NPV over three years amounts to twenty-nine thousand dollars, making it a worthwhile investment.
