Net Present Value (NPV)
NPV is the present value of all projected future cash flows minus the initial investment, with cash flows discounted at the required rate of return. Positive NPV indicates value creation.
| NPV Calculation Steps | Process |
| Project all cash flows | Annual NOI and terminal sale proceeds |
| Select discount rate | Required return reflecting risk |
| Discount each cash flow | Present value = Future value / (1 + rate)^years |
| Sum present values | Total of all discounted cash flows |
| Subtract initial investment | Acquisition cost and fees |
| Result: NPV | Value added or destroyed by investment |
| NPV Decision Rule | Action |
| NPV > 0 | Accept, creates value, price justified |
| NPV = 0 | Marginal, earns exactly required return |
| NPV < 0 | Reject, destroys value, overpaying |
| Higher NPV | Better investment (compare alternatives) |
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