A way to figure out if an investment or project is worth it.
Money can earn interest or returns over time. So, $100 today is worth more than $100 a year from now.
Steps:
• Work out how much money you expect to receive or spend with that investment in the future.
• Because future money is worth less, we "discount" those future amounts to their present-day value.
• Take the total of all the discounted future cash flows and subtract any initial cost of the investment.
If that is positive, the investment is likely to be profitable.