The net present worth (NPW) is the difference between the present worth of all cash inflows and outflows of a project.  Since all cash flows are discounted to the present the NPW method is also known as the discounted cash flow technique.  This method not only allows the selection of a single project based on the NPW value but also a selection of the most economical project from a list of  more than one alternative projects.

To find the NPW of a project an interest rate is needed to discount future cash flows.   The most appropriate value to use for this interest rate is the rate of return that one can obtain  from investing the money somewhere.  Alternatively, it can also be the rate that you will be charged if you had to borrow the money.  The selection of this rate is a policy decision.  In engineering economy this interest rate is known as the minimum attractive rate of return (MARR).  In our analyses we will assume that the value of MARR is known.

NPW Analysis Procedure

To determine the NPW of an investment project we need to know the net cash flow in each period over the service life of the project.  Knowing the MARR, each of these net cash flows can be discounted back to the present.  The present worth of all the cash flow transactions in the analysis period is the net present worth.

We have not made a distinction here between project life and analysis period.   When analyzing multiple projects with unequal project lives or when the project lives are equal but the analysis period is different, it is important to distinguish between project life and analysis period.  This distinction will be highlighted when alternatives analysis methods are introduced.  But for now to understand the use of the NPW method this distinction is not important.

When the information described above is available, the NPW is calculated by discounting the cash flows to the present as shown by Equation 7.1 in the text.  Please note that A_n, the annual net cash flow for period n, is positive when there is a net cash inflow and negative otherwise.  Also note that the variable "N" denotes the service life.

The magnitude of NPW determines whether the project is accepted or rejected.  If NPW is positive, the decision is to accept the project.  If it is negative, then the investment is not worthwhile economically.  If it is zero, then the project does not make a difference economically.