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 cash invested. It is the value counterpart of internal rate of return and a standard property investment calculator output. Cash on cash return is the one-year figure it generalizes.

For a rental, the cash flows are each year's cash flow after debt service plus the net sale proceeds in the final year. If NPV at your required return is positive, the deal earns more than you require; the price at which NPV is zero is the most you should pay.

NPV needs a discount rate and a forecast of rents, expenses and exit price. Cash on cash needs neither, which is why it comes first. A deal with a strong cash on cash return usually has a positive NPV at a reasonable discount rate; a deal with a weak one can still have a positive NPV if appreciation is strong, and that is the case NPV exists to evaluate.

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