Question 1

How is NPV calculated?

Accepted Answer

NPV = Σ [cash flow ÷ (1 + r)^t] − initial investment, where r is the discount rate and t is the year. Each future cash flow is discounted back to today's dollars, then the upfront cost is subtracted. A positive result means the project earns more than your required return.

Question 2

What discount rate should I use for NPV?

Accepted Answer

Use your cost of capital or the return of your next-best alternative. Companies use their WACC (often 8–12%); individuals often use expected market returns (~7–10%) or their borrowing cost. Higher-risk projects deserve higher discount rates.

Question 3

What does a positive NPV mean?

Accepted Answer

A positive NPV means the discounted future cash flows exceed the upfront investment — the project creates value beyond your required rate of return, so accept it. Negative NPV destroys value at that rate. NPV of zero means the project exactly earns the discount rate.

Question 4

NPV vs IRR — which should I use?

Accepted Answer

NPV gives an absolute dollar value created and handles irregular cash flows reliably; IRR gives a percentage return that is easy to compare against hurdle rates. Use both: NPV to rank mutually exclusive projects, IRR to communicate the return. When they conflict, trust NPV.

Year	Cash flow	Discounted value
1	$30,000.00	$27,272.73
2	$35,000.00	$28,925.62
3	$40,000.00	$30,052.59
4	$45,000.00	$30,735.61
5	$50,000.00	$31,046.07

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