| The present value of an investments future net cash flows minus the initial investment. If positive, the investment should be considered (unless an even better investment exists), otherwise it should not. It is a calculation based on the idea that œ1 received in ten years time is not worth as much as œ1 received now because the œ1 received now could be invested for those ten years and compound into a higher value. The NPV calculation establishes what the value of future earnings is in todays money. To do the calculation you apply a discount % rate to the future earnings. The further out the earnings are (in years) the more reduced their present value is. NPV is at the heart of securities analysis. Analysts use predictions of a companys future earnings and dividend payments, appropriately discounted back to current value, to establish a fundamental value for the shares. Simplistically, if the current share price is below that value, then the shares are, on the face of it, attractive. If above it, they are overvalued.
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