What is Present Value?

Present value is the discounted amount of a future cash receipt. The present value of future cash flows is always less than the same amount of future cash flows, since you can immediately invest cash received now, thereby achieving a greater return than from a promise to receive cash in the future.

What is Net Present Value?

Net present value is the discounted amount of all future cash receipts and expenditures. It is calculated as the difference between the present value of one or more inbound cash flows and one or more outbound cash flows.

Comparing Present Value and Net Present Value

There are several key differences between the present value and net present value concepts, which are as follows:

Purpose. Present value determines the worth of a future amount in today's terms, while net present value evaluates the profitability of an investment or project.
Inclusion of initial investment. Present value does not include the amount of any initial investment, while net present value deducts the initial investment from the present value of future cash flows.
Decision-making use. Present value is used to determine the present worth of a single amount or annuity, while net present value is used to decide whether an investment is financially viable.
Scope. Present value applies to individual cash flows, while net present value applies to entire projects or investments.
Relative size. Present value will always be higher than net present value, unless there are no deductions for expenditures that would normally be included in a net present value analysis.