Most people know that money you have in hand now is more valuable than money you collect later on. That’s because you can use it to make more money by running a business, or buying something now and selling it later for more, or simply putting it in the bank and earning interest. Future money is also less valuable because inflation erodes its buying power. This is called the time value of money. But how exactly do you compare the value of money now with the value of money in the future? That is where net present value comes in. Net present value is the present value of the cash flows at the required rate of return of your project compared to your initial investment. In practical terms, it’s a method of calculating your return on investment, or ROI, for a project or expenditure. By looking at all of the money you expect to make from the investment and translating those returns into today’s dollars, you can decide whether the project is worthwhile. When a manager needs to compare projects and decide which ones to pursue, there are generally three options available: internal rate of return, payback method, and net present value. Knight says that net present value, often referred to as NPV, is the tool of choice for most financial analysts. There are two reasons for that. One, NPV considers the time value of money, translating future cash flows into today’s dollars. Two, it provides a concrete number that managers can use to easily compare an initial outlay of cash against the present value of the return. It’s far superior to the payback method, which is the most commonly used. The attraction of payback is that it is simple to calculate and simple to understand: when will you make back the money you put in? But it doesn’t take into account that the buying power of money today is greater than the buying power of the same amount of money in the future. Managers also use