NPV is used to analyze the profitability of potential investments or projects. It compares the present value of cash inflows to the present value of cash outflows. If NPV is positive, the investment adds value to the firm and should be accepted. If NPV is negative, the investment subtracts value and should be rejected. To calculate NPV, expected future cash flows are discounted back to the present using the required rate of return, and summed. The example shows calculating NPV for a potential project with $100,000 initial cost and $30,000 annual cash inflows for 6 years, less $5,000 annual cash outflows. The NPV is positive $108,881, so the project should