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Net Present Value (NPV) is a financial metric used to assess the profitability of an investment or project. It calculates the difference between the present value of cash inflows and outflows over a period of time, taking into account the time value of money.
In simpler terms, NPV tells you how much value an investment is expected to generate in today's dollars. The time value of money principle acknowledges that a dollar today is worth more than a dollar in the future because of its potential earning capacity. Therefore, future cash inflows and outflows are discounted to their present values before being compared. If the NPV is positive, it suggests the investment should yield a return above the cost of capital, making it a worthwhile endeavor. Conversely, a negative NPV suggests the investment is likely to return less than the cost of capital.
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