NPV Calculator: How to Decide If a Business Investment Is Worth Making

A shop owner in Coimbatore is weighing whether to spend Rs 5 lakh on a new packaging line. The vendor promises it will pay for itself through extra orders over the next four years. That sounds fine on paper, but "pays for itself" and "worth doing" are not the same thing. Money that arrives in year four is not worth the same as money in hand today, and an NPV calculator is the tool that accounts for that gap. Using an NPV net present value calculator India business owners already trust turns a vague promise into a number you can actually compare against other uses of that Rs 5 lakh.

What is NPV? #

Net Present Value (NPV) is the sum of all the cash a project or investment is expected to generate, each discounted back to today's rupees, minus what you put in upfront. If that sum comes out positive, the investment is expected to add value beyond what you'd earn by putting the same money elsewhere at your chosen rate of return. If it's negative, the project destroys value even though the raw cash inflows look bigger than the initial outlay.

The "discount" part matters because a rupee in your hand today can be invested and grow. A rupee promised in year 3 has to be adjusted down to reflect that lost growth, plus the uncertainty of actually getting paid. NPV is the standard way businesses, private equity funds, and even municipal planning departments compare projects that pay out over different timelines.

How the NPV formula works #

The formula is:

NPV = Σ [CFₜ / (1 + r)ᵗ] for t = 0 to n

Where:

• CFₜ is the cash flow in period t (a negative number for the initial investment, positive for inflows)
• r is your discount rate, usually your cost of capital or the return you could get on an alternative investment
• t is the period number (year 0, year 1, year 2, and so on)

Each cash flow gets divided by (1 + r) raised to the power of how many years out it lands. A cash flow next year is discounted once; a cash flow four years out is discounted four times over, so it shrinks a lot more. You then add up every discounted cash flow, including the negative one at the start, to get NPV.

Picking the right discount rate is the part people get wrong most often. If you could safely earn 8% putting the money in a fixed deposit or bond instead, your discount rate should be at least 8%, usually higher to account for the fact that a business project carries more risk than an FD.

Worked example with real numbers #

Back to the Coimbatore shop owner. She's considering a Rs 5,00,000 investment in the packaging line, with expected cash inflows of Rs 1,50,000 in year 1, Rs 1,80,000 in year 2, Rs 2,00,000 in year 3, and Rs 2,20,000 in year 4. She uses a 12% discount rate, since that's roughly what she could earn investing the same money in a mix of debt funds and her existing business.

Adding the present values: 1,33,929 + 1,43,495 + 1,42,356 + 1,39,814 = 5,59,594. Subtract the initial outflow of 5,00,000, and NPV = Rs 59,594.

Since NPV is positive, the packaging line is expected to generate more value than simply earning 12% elsewhere with the same Rs 5 lakh. If the vendor's numbers hold up, it's worth doing. If her discount rate were 18% instead (say she has other options paying that much), the same cash flows would discount to a much smaller sum, and the project could easily flip to a negative NPV. That sensitivity to the discount rate is exactly why picking it carefully matters more than getting the cash flow forecast perfect to the rupee.

You can run this exact scenario, or your own numbers, on the NPV calculator. There's also a ready-made 10% discount rate, 4-year cash flow example and an uneven cash flow example at 10% if your project's inflows don't arrive in a neat pattern.

Why NPV matters for a business decision #

• It puts a rupee value on the decision, not just a yes/no gut call. Two projects that both "look profitable" can have very different NPVs once you discount their cash flows properly.
• It lets you compare projects with different timelines fairly. A project returning money faster is worth more than one returning the same total amount spread over more years, and NPV captures that automatically.
• It forces you to state your assumptions. Once you commit to a discount rate and a cash flow forecast, you can go back later and check which assumption was wrong if the project underperforms.
• It works for far more than factory equipment. Buying a franchise, renovating a rental property, or even deciding between two job offers with different bonus structures can all be run through the same formula.

Common mistakes and myths #

Myth 1: A project with a bigger total cash inflow is always the better choice. Total undiscounted cash flow ignores timing entirely. A project that returns Rs 10 lakh over 10 years can have a lower NPV than one returning Rs 7 lakh over 3 years, because the second project's money arrives sooner and gets discounted less.

Myth 2: NPV and IRR always agree on which project is better. They usually agree on whether a single project is worth doing, but when ranking two mutually exclusive projects of different sizes, NPV and IRR can disagree. NPV tells you the rupee value added; IRR tells you the percentage return. When they conflict, NPV is generally considered the more reliable guide for maximising actual wealth, not just percentage return.

Mistake 3: Using the same discount rate for every project regardless of risk. A government bond-like cash flow and a speculative new product launch shouldn't use the same discount rate. The riskier the cash flow, the higher the discount rate should be, because you need a bigger cushion for things not going as forecast.

Mistake 4: Ignoring inflation consistently. If your cash flow forecasts are in nominal rupees (including expected price increases), your discount rate should also be a nominal rate. Mixing a real discount rate with nominal cash flows, or vice versa, quietly distorts the answer.

Tips for using NPV well #

• Build a base case, a conservative case, and an optimistic case for your cash flows, and run all three through the calculator. If even the conservative case has a positive NPV, you have more confidence in the decision.
• Don't forget salvage value. If equipment can be resold at the end of its useful life, that resale value is a cash inflow in the final period and belongs in the calculation.
• Round-trip check your discount rate against something real: a fixed deposit rate, your business's cost of borrowing, or the return of a lumpsum mutual fund investment you could make instead.
• Revisit the calculation once the project is underway. Comparing actual cash flows against your forecast tells you whether your assumptions were reasonable, which makes your next NPV estimate better.

Frequently asked questions #

What discount rate should I use for NPV? #

Use the return you could realistically earn on an alternative investment of similar risk, often called your cost of capital. Many small business owners start with their cost of borrowing (the interest rate on a business loan) or a rate a few points above what a fixed deposit or debt fund pays, then adjust upward for projects that carry more uncertainty.

What does a negative NPV mean? #

A negative NPV means the project's discounted cash inflows don't cover the initial investment at your chosen discount rate. It doesn't necessarily mean the project loses money in absolute rupee terms; it means the money could work harder for you somewhere else at that same rate of return.

Is NPV the same as profit? #

No. Profit is usually calculated on an accounting basis and doesn't account for the time value of money. NPV specifically discounts future cash flows to reflect that a rupee today is worth more than a rupee in three years, which accounting profit figures don't do.

Can NPV be used for personal decisions, not just business? #

Yes. Anything with an upfront cost and future cash benefits, such as prepaying a loan, buying versus renting equipment, or comparing two investment options with different payout schedules, can be evaluated with the same formula. The XIRR calculator is a useful companion when your personal cash flows are irregular rather than fixed annual amounts.

Why did my NPV change a lot when I adjusted the discount rate slightly? #

Cash flows further out in time are more sensitive to the discount rate, since they get compounded down for more years. A project with most of its returns in years 3 to 5 will swing more with rate changes than one that pays back mostly in year 1. This is normal and is one reason it's worth testing a couple of different discount rates rather than relying on just one.

Bottom line #

NPV won't tell you whether your sales forecast is realistic or whether the vendor will deliver on time. What it does is take the numbers you already believe in and translate them into a single, comparable figure: does this investment add value at the rate of return you could otherwise expect? Run your own project's numbers through the NPV calculator before committing capital, and test a couple of discount rate scenarios rather than betting the decision on just one.