What is Net present value (NPV)?

Net present value (NPV) is like comparing two piggy banks to see which one will give you more money in the future.

Imagine you have $10 now, and you can either keep it or use it to buy a toy that will grow into $15 next year. NPV helps you figure out if waiting for that bigger amount is worth it.

Money today is more valuable than money tomorrow because you can do things with it now, like buying candy, playing games, or saving up for a new toy. So, NPV takes into account how much your money will be worth later by turning future amounts into what they’re worth today.

Let’s say you have two choices:

• Get $10 now, or
• Get $15 in one year.

If the toy costs $10 now, and it grows to $15 later, NPV helps you see if that growth is worth waiting for. If the toy gives you more value than just having the extra $5, then it's a good deal!

NPV is like a special scale that balances what you have today against what you might get tomorrow, and it helps you choose the best piggy bank.