What is NPV (Net Present Value)?

NPV is the gold standard for investment decision-making. A positive NPV means the investment generates returns above the required rate (typically the company's weighted average cost of capital, or WACC), creating shareholder value. A negative NPV means the project destroys value and should generally be rejected.

The formula sums discounted cash flows: NPV = Σ [CF_t / (1+r)^t] − Initial Investment, where CF_t is the cash flow in period t and r is the discount rate. The discount rate reflects both the time value of money and the risk of the investment. Higher-risk projects warrant higher discount rates.

In case interviews, NPV analysis appears in investment decisions, project evaluations, and M&A cases. You might be asked whether a company should build a new factory, launch a new product, or acquire a competitor. The key inputs to focus on are: projected cash flows (and their assumptions), the appropriate discount rate, and the time horizon. Even a rough NPV calculation demonstrates strong financial acumen.