Net Present Value - NVP
A method of determining whether expected performance of a proposed investment promises to be adequate.
Example: A proposed land investment requires $10,000 of cash now, and is expected to be resold for $25,000 in 4 years. For the Risks involved, the investor seeks a 20% Discount Rate (same as Compounded Rate of Return). The $25,000 amount to be received in 4 years, when discounted by 20% annually, is worth $12,056 now. Since the investment costs $10,000, the net present value is $2,056. $25,000 - $10,000 = $2,056 (1 + 0.20)4