Net Present Value or NPV can be defined as the integration of the present values (cashflows) with the addition of all the related cash inflows as well as cash outflows. It is derived to give a better perspective on the investment decision to be made with respect to a particular project. This is a reliable form of calculation for predicting the position of a company and give an in-depth analysis for investing or not in the project and if the investment will give a desirable return over a period of time. It can be understood when put in simple terms as; if a person has some money to invest and has more than one option to invest in then he/she should try to analyze the profits and returns he might yield while investing in one of the available option. The option which is more lucrative in terms of returns is then decided as the one to target. This is generally done through mathematical calculation and systematic interpretation. The mathematical formula, in general can be defined as the systematic method of reaching the inference of a problem. The formula used for the calculation of net present value is as follows:

NPV = S + { Cash flow for t year / (1+ R)^t } + { cashflow for n year /(1 + R)^n }

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

The Net Present Value of a company is considered to be by far a better method to calculate rate of return as compared to the internal rate of interest method as it takes into account practical and ground level figures. This also takes into consideration the circumstances through which one can arrive at a figure in currency denominations that are in dollars, pounds, euros or anything else for that matter.

Hence it can be infrenced that net present value is the net value calculated after subtracting all the costs from the benefits and is converted into the currency denomination in the present scenario. It is a good method to calculate the returns or benefits over a period of time or yearly. It is considered to be more accurate but at times the calculation becomes more complicated and it is not possible to imagine all the costs incurred and if those will count towards the benefits and hence proved a disadvantage in using this method of calculating returns on investment.

The rate of return as mentioned in the formula can be defined as the entity or value of returns expected if the same amount of investment is done in various other projects for the same period of time.

The use of currency in net present value proves to be an advantage as this allows an individual or a company to have real figures instead of glossy percentages to work upon their plan and investment strategy. 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 even hold a risk of a 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 there might not be gain on the investment but the decision for investment could be made by taking into account various other factors like increase in share holdings within a company.