Net Present Value

Net Present Value (NPV) is a financial metric that calculates the difference between the present value of future cash inflows and the present value of future cash outflows over a set period. It accounts for the time value of money, recognising that a dollar received in the future is worth less than a dollar received today. A positive NPV indicates a potentially profitable investment.

A trader evaluating whether to invest capital into a trading system or algorithmic strategy might use NPV to determine if the expected future returns, discounted to today's value, exceed the initial development and operational costs. If the NPV is positive, the investment may be worthwhile. Understanding NPV is also valuable when analysing companies, as businesses with strong positive NPV projects are typically better positioned for long-term growth, which can support a bullish investment thesis.