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Capital & valuation
Net present value
The sum of a project's future cash flows discounted to today, less the upfront investment. Positive means the project earns more than the discount rate.
Owned by: Senior analystTest band: Senior analyst
The formula
NPV = Σ CFₜ ÷ (1 + r)ᵗ − Initial investment
In practice
The discount rate is the whole argument. Use the business's cost of capital, and run the NPV at a rate two points higher to see how fragile the yes is.
The kind of thing the test asks
- A project costs $100k today and returns $60k at the end of each of the next two years. At a 10% discount rate, the NPV is about…