Net present value (NPV)
What the whole project is worth at present value, after the investment.
Money in the future is worth less than money today: you could invest today's money elsewhere, and the future is uncertain. NPV converts every future year's cash flow into today's value, adds them up, and subtracts the investment.
NPV = cash flow year 1 ÷ (1 + r) + cash flow year 2 ÷ (1 + r)² + … − total investment
Here r is your discount rate.
Reading it
- Positive NPV: the project earns more than your discount rate. It's worth doing on these assumptions.
- Negative NPV: you'd do better putting the money somewhere that returns your discount rate.
Choosing a discount rate
The rate reflects the return you'd expect for the risk you're taking:
| Situation | Typical rate |
|---|---|
| Established business, financed by a bank loan | 10 to 15% |
| New small business, funded by the owner | 15 to 25% |
| Early-stage startup, venture investors | 30 to 50% or more |
A higher rate makes distant years count for less, so NPV goes down. The dashboard slider shows how sensitive your result is.
NPV only counts the years in your projection, with nothing added for the business's value after the last year. That makes it a conservative measure.