How this number is made
Net present value discounts later cash back to today and subtracts what you spend now. A positive NPV means the cash flows beat the discount rate you typed. The rate is the hurdle, and the cash flows are an assumption.
- The upfront cost is spent today and is not discounted.
- Each year’s cash flow is the same in this version. Uneven projects need a spreadsheet.
Formula
NPV = −cost + the sum of cash ÷ (1 + rate) ^ year.
Worked example
With the figures already in the form, net present value is $5,898.
Questions
What discount rate?
The return you require, or your cost of capital. A higher rate makes fewer projects look acceptable.
Does a positive NPV mean I should do it?
It means the cash flows, if they happen, beat that rate. It does not make the cash flows true.