A particular rate of interest is used to discount future flows of cash to present values. The discount rate used might reflect the cost of obtaining capital, or a target rate/cut-off rate, or a risk-adjusted rate. Once the future cash flows are discounted to present-day values they are totalled and compared with the cost of the project. If the discounted cash flows exceed the cost the difference is the net cash flow. In general, if the NPV is positive the project is worth considering.
2 Comments