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The net present value (NPV) of an investment project is the difference between the present value of the stream of future net (or free) cash flows generated by the project and its current investment costs. Thus, this concept represents an application of cost-benefit analysis to problems in financial economics where net revenues are the benefits. A typical example is the expansion of a firm's manufacturing facilities, which requires the firm to sacrifice funds in the present so that it may increase its sales in the future.

Importance in Financial Management

The fundamental importance of the NPV concept to the financial management of the firm lies in the fact that investment projects with positive NPV increase the wealth of the firm's shareholders by that amount, whereas projects with ...

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