Discounted cash flow techniques, what is net present value (NPV)?

The difference between the present value of cash inflows and the present value of cash outflows. NPV is used in capital budgeting to analyze the profitability of an investment or project. NPV analysis is sensitive to the reliability of future cash inflows that an investment or project will yield.

In finance, discounted cash flow analysis is a method of valuing a project, company, or asset using the concepts of the time value of money. All future cash flow are estimated and discounted (Discounted Rate: calculate on the currenly rate which co. using for their other projects or prevailaing market rate for invenstment with the addup of margin) to give their present values (PVs)—the sum of all future cash flows, both incoming and outgoing, is the net present value(NPV), which is taken as the value or price of the cash flows in question. Present value may also be expressed as a number of years' purchase of the future undiscounted annual cash flows expected to arise.

It is useful for decision regarding any investment.

NPV is the difference between present value of future cash inflows and out flows. it is calculated by discounting the future cash flows at appropriate rate.

NPV is difference between Present value of Cash inflows and present value of cash outflow, 

NPV is tool to use for decision making, a project with higher NPV will always be preferred if we solely use NPV.

Net Present Value (NPV)  is the net of all the outputs (investments/expenses) and inputs (incomes/returns and sale proceeds at the end) of project discounted at a given discount rate.

OR

Net Present Value (NPV)  is the net value of all the future incomes and expenses at present time.

NET PRESENT VALUE is the method to evaluate a capital investment praposal.

In it a discounting rate is used to bring the future cash flows at present level and evaluate the praposal at with the help of comparing "present value of cash inflow with the present value of the cash outflow".

Dicounting Rate :- Usually discounting rate is taken as inflation rate but it must be decided from the perspective of expectation of investor.

NPV = Present Value of Inflow - Present Value of Outflow

If +ve - Praposal Accepted

If -ve  - Praposal Rejected

If0     - Praposal can also be accepted in this case because present value of inflow comes after satisfying the expectation investor. 

NPV- Net Present Value of Future Income . During Capital Budgeting outlay(investment) is going to spend current Period. but benefit of that outlay going to be generated in cash may be more than next2 years.

Now total surplus of Cash flow is Outlay(investment)-1st year cashinflow+2 nd year Cashinflow

Let us take one example

Out Lay -5 M (spend)

Cash Inflows1st year3M,2nd year3M

Now Net Cash inflow is1M {5M-6M(3M+3M)}. Now one question going to be arise because2nd  year inflow3M is not equal to Current year3M because of Notional Interest . thats called value of Money.

Thats  why we calculated the value of6M of next two years  in Current Value of Money.

Then it may be less than6M

Now net cash inflow will be more than1 M.

Its very complecated subject. if i have time i will explain in detail with some sample data.