What is net present value?
Net present value is the value today of a stream of future cash flows, minus the upfront cost to produce them. It applies the time value of money: a dollar next year is worth less than a dollar today.
It turns a project into a single, decision-ready number. A positive NPV means the investment is worth more than it costs; a negative one means it is not, at the chosen discount rate.
The NPV formula.
Net present value = the sum of each future cash flow divided by (1 plus the discount rate) raised to its year, minus the initial investment. This tool discounts up to five years of cash flows and nets out the upfront cost.
The discount rate is the lever. A higher rate shrinks the present value of distant cash flows faster, so the same project can swing from positive to negative as the rate rises.
A worked example.
At a 10% discount rate, an upfront 1,000 returning 300 a year for five years has a present value of inflows near 1,137, so NPV is about 137. Positive, so the rule says proceed.
How to read the result.
The decision rule is simple: a positive NPV creates value and clears the bar, a negative NPV destroys value as modeled, and an NPV near zero means the project earns roughly its discount rate and nothing more. The result is only as good as the inputs, so test it across a range of discount rates and cash-flow assumptions before committing.
NPV and IRR answer the same question two ways. Pairing the discount rate with customer value in present terms grounds the inputs in real economics.
How it is used.
Use NPV to compare investments on a level footing, since it accounts for both the timing and the size of every cash flow. Set the discount rate to your cost of capital, then accept positive-NPV projects when capital allows.
For a SaaS business, the cash flows that feed an NPV improve when growth is efficient, which is part of the case for efficient growth that lifts the return.