IT Financials Glossary

NPV (Net Present Value)

Posted in ROI by mgentle on August 26, 2010

NPV (Net Present Value): The present value (discounted at the required rate of return) of an investment’s future cashflows minus the initial investment. An NPV of zero means that the project pays for the original investment plus the required rate of return. A positive NPV means a better return, and a negative NPV a worse return.

NPV is a financial criterion for evaluating the profitability of a project investment. Note, though, that there are also other, non-financial, criteria for evaluating project investments (see “Combining costs and benefits” in Chapter 3).

FURTHER READING: for an explanation on the time value of money, which ends with an example of how to derive NPV, check out the following article by Michael Sack Elmaleh.

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Portfolio management

Posted in ROI by mgentle on August 26, 2010

Portfolio Management: an investment method that spreads investments across a number of well-defined categories based on a combination of business objectives, expected return and risk (see “Portfolio-based investment planning” in Chapter 2). The layman’s equivalent of portfolio management is “don’t put all of your eggs in one basket”.