Question

When comparing two different infrastructure projects, why is it more accurate to use Net Present Value than simply adding up the total cash the projects will make over their whole lives?

Accepted Answer

Money today is worth more than the same amount of money in the future. This is because you can invest money you have right now to earn interest. If you wait years to get paid, you lose the chance to grow that money in the meantime. Net Present Value, or NPV, is a way to calculate what all that future cash is actually worth to you right now. It adjusts for the time value of money, which is the idea that a dollar today is better than a dollar later. For example, getting 100 dollars today is better than getting 100 dollars next year, because you could put today&#x27;s money in a savings account to earn interest. If you just add up all the total cash a project makes over its life, you ignore this timing difference. You might think two projects are equal because they pay the same total amount, but one project might pay you most of the money in the first year while the other makes you wait ten years. NPV shows you which project is truly better by bringing all those future payments back to today’s value so you can compare them fairly.

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When comparing two different infrastructure projects, why is it more accurate to use Net Present Value than simply adding up the total cash the projects will make over their whole lives?

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