The approach
Discount each future cash flow to a common date using a consistent period and price basis. Then test the assumptions that drive the result.
- Include the initial outlay, later costs and benefits as signed net cash flows.
- Use a justified rate consistent with the cash flows and their timing.
- Compare NPV with affordability, strategic fit and sensitivity to the least certain inputs.
Worked example
An illustrative €100,000 outlay followed by three annual €40,000 receipts, discounted at 10%, has NPV of €-525.92.
Try the inputs
Limits & next steps
A small change in benefits or timing can change the decision. Financial value alone does not establish affordability or capture every non-monetary objective.
Source & further reading
This explanation and worked example are independently written. The linked publication provides context for the technique; it is not a licence to reuse its material.