What does net present value help determine in a discounted cash flow analysis?

Net present value (NPV) is a key metric used in discounted cash flow analysis to assess the profitability of an investment or project. It calculates the present value of expected future cash flows generated by the investment, subtracting the initial investment cost. This helps determine how much value an investment will add to the company, which can be interpreted as the market value of the project or investment.

When the NPV is positive, it indicates that the projected earnings (in today's dollars) exceed the anticipated costs, signifying that the investment is expected to enhance the company's value. Conversely, a negative NPV implies that the anticipated costs outweigh the expected benefits, suggesting that the investment could detract from the company’s value. This relationship forms the foundation for decision-making in finance regarding whether to pursue or reject an investment opportunity.

In this context, identifying the market value of the investment or project aligns directly with the purpose of calculating NPV, as it reflects the net gain or loss in value resulting from future cash flows relative to the initial outlay.