Net Present Value (NPV)

Net present value adds up an investment's future cash flows, each discounted back to today at the required rate of return, and subtracts the upfront 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.

With a rental, each year's cash flow is NOI less debt service, and the last year also includes the net proceeds from selling. The discount rate is the return the investor requires for the risk. A positive NPV at that rate means the price works; the price that brings NPV to zero is the ceiling 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.