The net present value (NPV) is a calculation used to measure the profitability of a project by determining its expected future net cash flows discounted to their current values. In order to calculate this figure, one must first determine the relevant net cash flows after tax that will be generated from the project in question. For example, if we assume that a new factory will produce estimated annual revenues of $1M and have total costs of $800K then the NPV can be calculated using these figures as follows:
Revenues – Costs = Net Cash Flows After Tax = $1M – $800K = $200K; Discounted at 10% over 5 years: NPV = ($200K x 1.10^5) – 800k = $589K.
Based on this calculation, it appears that the project is acceptable since its NPV is positive; however it should also be noted that other factors such as inflation or potential risks associated with investments/projects may further affect whether or not it should ultimately be pursued.