Net Present Value or NPV can be defined as the integration of present values (cash flows) with the addition of all related cash inflows as well as cash outflows. It is derived to give a better perspective on an investment decision to be made with respect to a particular project. This is a reliable form of calculation and predicting the position of a company while giving an in-depth analysis for investing or not investing in a project. Most notably if the investment will give a desirable return over a period of time. The formula used for the calculation of net present value is as follows:

Where "S" denotes initial investment, "t" denotes the number of year, "R" denotes rate of return, "n" denotes the number of years.

• The use of figures in net present value allows for greater understanding than percentage based calculation when scalability is predefined.
• For an investment in a project, if the net present value figure is greater than zero ( NPV > 0 ) then the project will hold good potential for investment for the company or individual. If the net present value is less than zero ( NPV < 0 ) then it denotes that the investment will not give the desired return and burdens a risk of loss, hence this project should be avoided. On the other hand if the net present value, after calculation is equal to zero (NPV = 0) then it denotes that the project will not be profitable but it could be useful if you have ulterior motivation, such as to inflate your shareholdings in a company with a view to using that company to gain higher yields for other projects or as part of a more cohesive strategy.
• The future value is converted into the present value and is compared to the other investment options on a similar platform. This gives an insight into the direct comparison of different investment opportunities in more realistic terms.

• It is considered to be more accurate but at times the calculation becomes more calculated and it is not possible to imagine all the costs incurred and if those will count for the benefits hence providing a small disadvantage in this method.
• Other disadvantage of NPV is that the future values are calculated in today’s currency values which is a flawed assumption.
• There is no universally acceptable or stable discount rate, which again poses a loose link in the calculation and since most of the assumptions are based on it, the entire calculation could be skewed.
• Inaccuracy in defining the sunk costs is also a disadvantage in this method.
• Ambiguity on consideration of the non-monetary benefits and costs also acts as a disadvantage as that could result in an inaccurate assumption.