Two simplifying assumptions are usually made in net present value analysis
1. Assume that all cash flows other than the initial investment occur at the end of periods.
2. Assume that all cash flows generated by an investment project are immediately reinvested at a rate of return equal to the discount rate.

The difference between the current value of cash inflows and cash withdrawals over a period of time is known as net present value (NPV). To evaluate the viability of a proposed investment or project, NPV is used in investment planning and capital budgeting. In short, NPV is used to assess whether or not a long term investment or a project will be profitable.

If a long-term project has multiple or several cash flows, the formula to calculate NPV during a single time t will be as follows:

NPV = ∑ [tex]\frac{R_{t}}{(1 + i)^{t} }[/tex]

Where,

[tex]R_{t}[/tex] =net cash inflow-outflow

i = return to be earned or discount rate in another investment

t=number of time periods

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