The NPV of a project is simple, the benefits minus the costs, and is expressed in dollar terms.  Not unlike a profit and loss statement, NPV tells you the magnitude of the project.  The pluses of NPV include:

  • It is simple to calculate
  • It takes into account the time value of money

The equation for a three-year NPV is

NPV = (net benefit year 1 / (1+discount rate) + net benefit year 2 / (1+discount rate)^2 + net benefit year 3 / (1+discount rate)^3) - initial costs