Accounting Dictionary

NPV

NPV means Net Present Value.

Let’s say you need $10,000 in three years to pay your child’s tuition. You know you can get 12% interest on your money.

Year Beginning Value Interest New Value Including Interest
1 $7,120 (.12 x $7,210) $854.40 ($7,120 + $855.40) $7,974.40
2 $7,974.40 (.12 x $7,974.40) $956.93 ($7,974.40 + $956.93) $8,931.33
3 $8,931.33 (.12 x $8,931.33) $1,071.76 ($8,931.33 + $1,071.76) $10,003.09

 

If you wanted $10,000 in three years, you would have to put $7,120 in the bank today. So we would say at 12% interest, $7,120 is the present value of $10,000.

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