Understanding the concept
What is NPV?
NPV stands for Net Present Value. It tells you whether an investment is worth making — in today's money. Why does this matter? ₹1,00,000 received 5 years from now is worth less than ₹1,00,000 today, because money today can be invested to grow. NPV adjusts all future cash flows back to their present value, then checks if the investment clears your minimum return benchmark. It is the most reliable way to compare investments of different sizes and durations.
NPV
=
−Initial Investment + Σ [ Cash Inflow ÷ (1 + Rate)^Year ] + Terminal Value ÷ (1 + Rate)^n
If NPV > 0
→
Worth investing — earns more than your minimum required return
If NPV < 0
→
Does not meet your return benchmark — reconsider or renegotiate
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Initial Investment
The total amount you put in upfront today — purchase price, setup costs, installation, and all one-time expenses needed to get this investment running.
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Annual Cash Inflow
The net money this investment generates each year after all running costs. Be conservative — use a realistic, slightly pessimistic estimate rather than your best-case scenario.
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Project Duration
How many years this investment will continue generating returns. After this period, the calculator stops counting inflows. Use the practical useful life of the asset.
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Discount Rate
Your minimum acceptable annual return — the benchmark any investment must beat. For most Indian businesses, use 12–15%. Higher risk investments should use a higher rate (15–20%).
Simple rule: If your investment earns more than your discount rate, NPV will be positive and the investment is worth making. If it earns less, NPV will be negative and you should look for a better use of your money.