Net present value( NPV )is the value obtained by discounting all cash outflows and inflows of a capital investment project by a chosen target rate of return or cost of capital.

 The NPV method compares the PV of all the cash inflows from an investment with the PV of all the cash outflows from an investment.

Decision rule:
-If the NPV is positive, the return from investment’s cash inflows > cost of capital, undertake project
-If the NPV is negative, the return from investment’s cash inflows < cost of capital, reject project
-If the NPV is zero, return from investment’s cash inflows = cost of capital

Note: we assume the cost of capital is the organization’s target rate of return for proposed investment projects.

Advantages
1.It considers the time value of money.
2.It considers the whole life of project.
3.It is based on cash flow not the profit.
4.It is an absolute measure of return, and can reflect the size of project.
5.It maximises the shareholder’s wealth （positive return means the return from the investment is higher than the return required by the shareholders）


Disadvantage
1.DCF methods use future cash flows that may be difficult to forecast.
2.The cost of capital may be difficult to estimate and it may change over the life of the investment.
3.Acceptance all projects with a positive NPV will not apply when the capital is rationed.