![]() ![]() In general, the investment with the highest NPV is the most valuable because its eventual payout is worth the most in present dollars. Finding the NPVs for multiple investment opportunities allows you to easily compare your investments to determine which are more valuable than others. In other words, it's $11.73 more profitable than your alternative investment.Ĭompare investment opportunities by their NPV. In fact, this means that the juicer made you the required return rate of 4% annually, plus an additional $11.73 on top of that. Note that this doesn't mean that the electric juicer only made you $11.73. Since this is positive, you'll probably decide to buy the juicer. In the lemonade stand example, the NPV is $11.73.Note that these are generalities-in the real world, much more usually goes into the process of determining whether a certain investment is a wise idea.If the NPV is negative, your money is better invested elsewhere, and your proposed investment should be rejected.In general, if the NPV for your investment is a positive number, then your investment will be more profitable than putting the money in your alternate investment and you should accept it.X Expert Source Jonathan DeYoe, CPWA®, AIF®Īuthor, Speaker, & CEO of Mindful Money Expert Interview. Use that number to determine whether it's a good investment or not. The NPV basically tells you the value of your future payout minus your invested cash amount. In this case, 0.04' (4% expressed as a decimal) is the discount rate we'll use in our calculation.ĭetermine whether or not to make the investment. In the lemonade stand example, let's say that if you don't purchase the juicer, you'll invest the money in the stock market, where you feel confident that you can earn 4% annually on your money.that you might put your money in instead of making the investment you're analyzing. In simpler situations, you can usually just use the return rate on a savings account, stock investment, etc. In corporate finance, a firm's weighted-average cost of capital is often used to determine the discount rate.This is called your "discount rate" and is expressed as a decimal, rather than a percent. This concept is called the “time value of money.” For NPV calculations, you need to know the interest rate of an investment account or opportunity with a similar level of risk to the investment you're analyzing. In other words, it's better to have $10 today than $10 one year in the future because you can invest your $10 today and have more than $10 in a year. This is because the money you have today can be invested in an interest-earning account and gain value over time. In general, a given amount of money is worth more now than it is in the future. ![]() This article has been viewed 826,519 times.ĭetermine the appropriate discount rate. ![]() In this case, 100% of readers who voted found the article helpful, earning it our reader-approved status. WikiHow marks an article as reader-approved once it receives enough positive feedback. There are 14 references cited in this article, which can be found at the bottom of the page. Jonathan has been featured in the New York Times, the Wall Street Journal, Money Tips, Mindful Magazine, and Business Insider among others. He also earned his Accredited Investment Fiduciary (AIF®) credential from Fi360. ![]() He studied Financial Analysis at the CFA Institute and earned his Certified Private Wealth Advisor (CPWA®) designation from The Investments & Wealth Institute. With over 25 years of financial advising experience, Jonathan is a speaker and the best-selling author of "Mindful Money: Simple Practices for Reaching Your Financial Goals and Increasing Your Happiness Dividend." Jonathan holds a BA in Philosophy and Religious Studies from Montana State University-Bozeman. Jonathan DeYoe is a Financial Advisor and the CEO of Mindful Money, a comprehensive financial planning and retirement income planning service based in Berkeley, California. This article was co-authored by Jonathan DeYoe, CPWA®, AIF® and by wikiHow staff writer, Megaera Lorenz, PhD. ![]()
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