NPV of $1 Million for a Project Means What

Net Present Value (NPV)
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C.J.Shah
Sales, United States

NPV of $1 Million for a Project Means What

If a NPV of one project is $1 million, what does it mean to an investor?

  Hennie Stander
Accountant, South Africa
 

Meaning of NPV for Investors

We are taught that if a project shows a positive NPV it should be accepted as it is forecasted that the project will generate a positive inflow of cash over its lifetime after future cash flows have been discounted (assuming ones assumptions are accurate).
However, the $1m NPV should also be looked at as a percentage of the initial outlay and compared in this manner to other projects which the investor might be forced to choose from.

  Management Fan
Analyst, Philippines
 

NPV Meaning to an Investor

Basically it means the project is worth-pursuing. Because the hurdle rate or cost of capital have already been calculated for the expected cash flows of the project in the future period are dragged to the present period. This gives you the value of the project now.
In addition, because above rate is used, this implies that you will gain in the project for its future cash flows against foregoing if you are going to invest your capital elsewhere (eg. bank, mutual fund, stock market.
To the investor, this is value creation.

 

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