'Net Present Value - NPV

Net Present Value (NPV) is 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 a projected investment or project. 

 formula for calculating NPV: 

where

C_t = net cash inflow during the period t

C_o = total initial investment costs

r = Discount rate and

t = number of time periods 

A positive net present value indicates that the projected earnings generated by a project or investment (in present rupees) exceeds the anticipated costs (also in present rupees). Generally, an investment with a positive NPV will be a profitable one and one with a negative NPV will result in a Netloss. This concept is the basis for the Net present value(NPV) which dictates that the only investments that should be made are those with positive NPV values.

When the investment in question is an acquisition or a merger, one might also use the Discounted cash flow (DCF) analysis.