Calculating net present value (NPV) is a financial tool used to assess the profitability of an investment or project. It involves determining the present-day value of future cash flows, taking into account the time value of money.
NPV is crucial for making informed investment decisions. It provides insights into whether a project will generate a positive return, allowing businesses to prioritize opportunities with the highest potential for value creation. The concept of NPV has its roots in 19th-century economics, with Irving Fisher’s seminal work on the time value of money.