What is Net Present Value (NPV)?

Definition

Net Present Value (NPV) is the difference between the present value of all future cash inflows from an investment and the present value of its outflows. A positive NPV means the investment creates value at the chosen discount rate; a negative NPV means it destroys value. NPV is the theoretical foundation of every Discounted Cash Flow (DCF) valuation.

The core idea is that a dollar received in the future is worth less than a dollar today, because the dollar today can be invested to earn a return. NPV puts every future cash flow on the same footing — today’s dollars — by discounting them at a chosen required rate of return. The discount rate compresses distant cash flows more aggressively than near-term cash flows, which is why NPV calculations are so sensitive to terminal value and to the discount rate itself.

Formula

For an ongoing business, the formula extends with a terminal value at year n: TV_n = CF_n+1 / (r − g), which is then discounted back to today as TV_n / (1 + r)ⁿ. The intrinsic value of an equity is the sum of the explicit-period NPV and the discounted terminal value.

Worked example: 5-year cash flow

Assume an investment requiring $1,000 up front, generating the following cash flows over 5 years, discounted at 10%.

The NPV of approximately $291 means that at a 10% required return, the project is worth roughly that much more than its initial cost in today’s dollars. If the discount rate rose to 15%, the NPV would shrink (and at a high enough rate would turn negative). This sensitivity is exactly why a single point estimate is never enough — analysts run a discount-rate sensitivity table, typically from r−2% to r+2% in 0.5% steps, and report the range of NPVs.

Calculate NPV

Enter an initial investment, a constant annual cash flow (annuity), the discount rate, and the number of years. For irregular cash flows, use the full DCF Calculator instead.

For non-uniform cash flows, terminal values, or full stock DCFs, jump to the DCF Calculator which supports ticker auto-fill.

Choosing a discount rate

The single most influential input in any NPV calculation is the discount rate. Too low, and every investment looks brilliant; too high, and nothing clears the hurdle. The right answer depends on what is being valued and from whose perspective.

For a stock-level DCF, the most common practice is to use the Weighted Average Cost of Capital for free cash flow to the firm, or the cost of equity for free cash flow to equity. Be consistent: never mix an after-tax WACC with pre-tax cash flows or vice versa.

NPV vs related capital-budgeting metrics

NPV is the academic gold standard, but practitioners often supplement it with IRR, payback period, or profitability index. Each metric answers a slightly different question.

How value investors use NPV

For a value investor, NPV is not a forecasting exercise — it is a discipline. The point is not to pin down the “true” intrinsic value to the nearest dollar, which is impossible. The point is to bound the range of plausible intrinsic values under conservative assumptions, then look for a market price well below the lower end of that range. The gap is the margin of safety, and it absorbs forecasting errors and adverse surprises.

Warren Buffett famously claimed that the intrinsic value of any business is the NPV of all the cash it will produce between now and judgement day, discounted at the long government bond rate. In practice, Buffett uses a higher rate (and adds a margin of safety on top) because forecasting cash flows decades out is inherently uncertain. Charlie Munger has joked that he has never seen Buffett actually compute a DCF — the mental model is the discipline, not the spreadsheet.

On the ValueMarkers platform, the DCF Calculator implements NPV with a five-to-ten year explicit horizon plus a Gordon Growth terminal value. The result is shown as both a per-share intrinsic value and an implied margin of safety against the current market price. The Stock Screener then exposes DCF margin of safety as a filter, so value investors can rank candidates by the discount of price to NPV.

[Javier insight: Every NPV I run, I run twice. Once with the assumptions I believe. Once with the assumptions I would defend to a critic at dinner — a higher discount rate, a lower terminal growth rate, a haircut to the first-year cash flow. If the second NPV is still comfortably positive, the idea graduates from interesting to actionable. If it flips negative, I file the spreadsheet under “wait for a better price”.]

Frequently asked questions

Related glossary terms