How is net present value (NPV) computed and interpreted?
NPV is computed by taking the difference between the present value of the cash outflows and the present value of the cash inflows associated with a capital investment.
If the NPV of an investment is equal to zero, then the investment generates a return equal to the discount (or cost of capital) rate used in the NPV calculations. The discount (or cost of capital) rate is the minimum required rate of return the investment project needs to generate in order to be considered acceptable. If the NPV is greater than zero (or positive), the investment is considered "acceptable" because it generates an actual return greater than the discount rate. If the NPV is less than zero (or negative), the investment is considered "unacceptable" because it generates an actual return less than the discount rate.
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