Nettonykyarvo

Nettonykyarvo, or net present value (NPV), is a financial metric used to assess the profitability of an investment or project. It measures the value today of expected future cash inflows and outflows, discounted at a chosen rate, minus the initial investment. The standard formula is NPV = sum from t=1 to n of CF_t / (1 + r)^t − I0, where CF_t is the net cash flow in period t, r is the discount rate (often the cost of capital or required return), n is the project horizon, and I0 is the initial outlay.

Interpretation and use: A positive NPV indicates the project is expected to add value above the required return, while a negative NPV suggests destruction of value. An NPV of zero means the project earns exactly the discount rate. NPV is widely used in capital budgeting to compare alternatives on a common financial basis. It is related to the internal rate of return (IRR), as IRR is the discount rate that makes NPV equal to zero; when choosing among projects, a higher NPV at the same r is preferred.

Limitations and considerations: NPV relies on estimates of future cash flows and the discount rate, both of which carry risk and uncertainty. Results can be sensitive to input changes, such as cash-flow timing, magnitude, and horizon. Non-financial factors, strategic fit, and corporate risk should also influence decisions, since NPV focuses on monetary value within a given framework and time horizon. For unusual cash flows, multiple sign changes can complicate interpretation, requiring scenario or sensitivity analysis.