A positive NPV means that the investor paid less than the present value for the stream of cash flows. A negative NPV means that the investor paid more than the present value for the stream of cash flows. An NPV equal to zero means that the investor paid the same amount as the present value for the stream of cash flows.

Finding NPV
with a financial calculator

Most financial calculators may be used to calculate NPV. The basic idea is to input each cash flow in its proper order. Remember to input the original capital investment (CF0) and any other cash outflows as negative numbers. After inputting the positive and negative cash flows, input the appropriate discount rate and then push the NPV key to find the solution. Check the owner's manual for specific details.

Analyzing
a potential project

Companies often calculate NPV to evaluate potential projects. Analysts forecast the expected cash flows, discount the cash flows at the appropriate rate, and subtract the estimated initial capital investment. A project with a positive NPV creates value for the shareholders of the company, whereas a project with a negative NPV destroys value for the shareholders.

Independent projects

Companies with limited funds to invest, and several potential independent projects to evaluate, often rank the projects according to NPV and then invest in those projects with the highest NPV. The term "independent projects" means that a change in the cash flows in one project has no effect on the cash flows in any other project - each project is independent of all others being considered. The concept of independence is important for making NPV decisions. For a more thorough discussion on independent events, consult a probability textbook.

An example will illustrate the use of the net present value formula to evaluate a project.