what is Net present value?

Net Present value means the value of the future cash flows expressed in present. This is because dollar today does not equal to dollar in future. Moreover, if we invest in projects, we would like to value whether the projects is worth taking or not and the projects usually last for many years. Therefore, we need to calculate the sum of present value of future cash inflows and deduced them from present initial investments, that is, NPV, to judge whether we should take the projects. You might ask, how should we calculate the present value of future cash inflows? This can be done by DISCOUNTING the future value (FV) by the cost of capital (your funding cost), and the discounting rate is 1/(1 cost of capital)^n, where n is the number of years from present. Mathematically, NPV = FV1/(1 cost of capital)^1 FV2/(1 cost of capital)^2 ..... FVn/(1 cost of captial)^n. IF NPV>0, we should take the project, if NPV<0, we should reject the projects. If you value the private projects, we would use private discount rate which means the cost of funds borrowed. On the other hand, if you are going to value social projects such as highway systems, dams, environmental project, we should use social discount rate which is much more difficult to estimate as it includes the cost/benefits to the public and society e.g. convenience to road users, estimated medical costs saved....... all of them are very difficult to expressed quantitatively.