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NPV (Net Present Value)
The difference between the present value of future cash flows and the initial investment cost.
Definition
Net Present Value calculates today's value of all expected future cash flows from an investment, minus the initial cost of acquiring it. A positive NPV means the investment is expected to earn more than your required rate of return, making it a good financial decision. A negative NPV suggests you could earn a better return elsewhere. NPV requires choosing a discount rate, which typically reflects your minimum acceptable return or cost of capital. For real estate, future cash flows include rent, tax savings, and eventual sale proceeds. NPV is especially useful when comparing investments with different hold periods and cash flow patterns.
Related Terms
IRR (Internal Rate of Return)
The annualized return that accounts for the timing and magnitude of all cash flows over the investment period.
Cash Flow
The net money remaining after all income is collected and all expenses and debt payments are made.
ROI (Return on Investment)
The total return earned on an investment expressed as a percentage of the amount invested.
Cap Rate
The ratio of a property's net operating income to its market value, used to estimate return potential.
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