Net Present Value (NPV)

Net present value is the sum of an investment's future cash flows, each discounted to today at a required rate of return, minus the initial cost. A positive NPV means the investment earns more than the required rate. It is what a full discounted cash flow analysis produces where a cap rate gives only a one-year snapshot.

For a rental, the cash flows are each year's NOI minus debt service plus the net proceeds of a sale in the final year. The discount rate is the return the investor requires for the risk. If NPV at that rate is positive, the price is acceptable; the price at which NPV is zero is the most the investor should pay.

Cap rate and NPV agree in one case: constant NOI growth, a sale at the same cap rate, and a discount rate equal to cap rate plus growth. Whenever those assumptions break, NPV is the more complete answer and the cap rate is the screen that decided whether to run it.

Further reading: Net Present Value (NPV) on Wikipedia.