Mohit Rawat

Hi there, In a nutshell, NPV (Net present value) is a tool that has been used by most decision makers widely in various industries to gauge the profitability of a project in years to come to check its feasibility. Let's understand this in details with below example, So, we have a project manager who wants to check if an investment in a project that he wants to pursue will be profitable or not in given time horizon ( let's say 5 years). In order to check this, he first will forecast the future cashflows year on year and discount these cashflow values to the present day (at the time of investment) using a discount rate (The discounting rate is actually a rate to find the time value of money over the period of time considering various parameters). Let's say, -> (FC1), (FC2), (FC3), (FC4), (FC5) are the future cashflows in year 1,2,3,4,5 respectively -> discounting rate is R% After discounting these cashflows to the present day we add these values and we have a present value of all our future cashflows. Present value of future cashflows = ((FC1)÷(1+R)^1) + ((FC2)÷(1+R)^2) + ((FC3)÷(1+R)^3) + ((FC4)÷(1+R)^4) + ((FC5)÷(1+R)^5) Now, to check the feasibility of this project, we just need to subtract the Investment value from the present value of our cashflows. NPV = (Present value of future cash flows) - (Investment value) As a result of this subtraction, we get our NPV of the project. Now, if this NPV comes out to be positive, our investment is fruitful and if it is coming out be negative, it is a loss making investment and we shouldn't be going for it. NPV = positive, -> Investment is profitable NPV = negative, -> Investment is loss making NPV = 0, -> Break-even point Hope, this clears and helps in getting the basic understanding of NPV and will also help you in check the feasibility of your future projects. Best wishes