Net Present Value (NPV)
A financial metric that compares the present value of an investment's expected future cash flows against its upfront cost - a positive NPV means the project creates value.
Key takeaways
- NPV calculates the value today of a future stream of cash flows from a project or investment.
- It requires an estimate of the cash flows over time and a discount rate equal to the minimum acceptable rate of return.
- The discount rate typically reflects your cost of capital or the return available on a comparable-risk alternative.
- A positive NPV means the project's rate of return is above the discount rate - i.e. it creates wealth.
In plain English
NPV asks one question: "After accounting for the fact that money in the future is worth less than money today, does this project still leave us better off than the alternative?"
It does this by discounting every future cash flow back to today's value, summing them, and subtracting what you paid up front. The number you're left with - the Net Present Value - is the new wealth the project creates in today's money, over and above simply earning your cost of capital on the cash.
The discount rate is the lever that captures the time value of money. Inflation erodes future cash, and any cash you commit to this project could otherwise have been invested elsewhere - usually a safe asset like a government bond, or your own weighted average cost of capital. The discount rate is the bar the project must clear.
How to read the result
Positive NPV - the project's return beats the discount rate. It is expected to create value and is worth undertaking.
Negative NPV - the project's return falls short of the discount rate. Capital is better deployed elsewhere.
Zero NPV - the project exactly meets the cost of capital. Neutral.
Where it sits on the dashboard
On the Solar ROI dashboard, the NPV figure is the value created by the system after it has paid back the CAPEX, paid the cost of capital, and discounted every future £ of import savings and export revenue back to today's pounds.