Investment appraisal is an essential element of the process of accepting or rejecting investments. Investment decisions are vital to any business; there are large amount of money involved and their impact can be huge for both business survival and reaching profit driven objectives. It is not easy to abandon a project when the funds are committed and major losses can therefore occur even after they have been anticipated and the preference would otherwise be to allot capital elsewhere. There are a few important methods to evaluate investment proposals, such as the internal rate of return method (IRR method), payback period (PB method), profitability index (PI method) and net present value (NPV). There are also a few additional methods of evaluating new projects: the modified internal rate of return (MIRR), the accounting rate of return (ARR) and the discounted payback period (DPB).

The net present value - NPV, is the difference between the investment’s price and its expenses. The word "present" means that a single dollar value will be derived for the investment made today through the entire lifecycle of the investment. It is possible to estimate the future cash flow that an investment will create using calculations. NPV is a very important financial tool to calculate anticipated benefits and expenses over different periods of time. To calculate NPV, you must discount all anticipated benefits and expenses to present value (PV).

NPV=PV-the cost of the project (initial value).

All costs must be in the same unit and you can already compare the discounted cash flow to the initial investment value. NPV is always considered in terms of incremental investment. If NPV is greater than zero, the investment can be accepted; if NPV is equal to zero, the situation is neutral; if NPV is less than zero, the investment can’t be accepted.

NPP is given by the expression

Where P is the cash inflow, and IC the cash outflow; "i" is the discount rate.

This formula gives more than numbers; major decisions can be taken analyzing, forecasting and interpreting this data. NPV is a vital tool to maximize investment profitability and minimize possible risks. NPV is meaningful information for any investor. It also provides knowledge in cash flow, monitoring it and making the best investment decision. NPV and IRR show you where to look to find new opportunities to maximize your profit, and minimize your risks. You also have to know the necessary tools to understand and avoid the mistakes financial specialists make during their activity and manage your team to increase both productivity and performance.

Remember that if NPV, is less than zero, the investment proposal must be refused; a negative cash flow is the anticipated output. Never forget that the money available today is worth more than the same amount in the future. Earning potential is the main factor and the core principle of financing. Any amount of money is worth much more than the same amount in the future, the present discount value is the most common way to refer to this principle. The NPV method has a few major advantages, such as the lack of timing difference in cash flows; the time value of money being a factor; as well as percentage based profit analysis.