Net Present Value (NPV)

NPV discounts all future Cash Flows plus a Terminal Value at a Discount Rate. When Buying a Stock, if the NPV is above the current Share Price, it is positive.

There are three broad methods to value a Stock, Intrinsic Value, Ratio Analysis and an Event occurring. Net Present Value (NPV) comes under Intrinsic Value. In valuing a Stock, all future Cash Flows and the Terminal Value are discounted at a Discount Rate. OK, the key determinates are future Cash Flows and the Discount Rate. Once the Cash Flows and TV are estimated, the appropriate Discount Rate must be determined. The Discount Rate can be viewed as the Opportunity Cost of Capital, or one could use the Risk-Free Rate + Equity Market Risk Premium specific for the Stock. The decision here is arbitrary. What you are determining is the acceptable return based on the risk. The higher the Discount Rate the lower the NPV. An NPV greater than the Share Price is positive.