Net Present Value

Definition

A valuation method used in capital budgeting projects such as a small business purchase, which compares the Present Value of future benefits the investors receive from the project against the of the investments needed.

What It Means

The rule for a small business acquisition viewed as a capital investment project is stated as follows:

Invest in the project if its net present value is positive.

The idea is that buying the business is justified if the value of the benefits received exceeds that of the investments required. The typical benefit expected from a small business purchase is an income stream, such as the discretionary cash flow. This cash flow benefit is discounted to determine its present value. This approach is also taken by the Discounted Cash Flow business valuation method.