What is net present value?▾
The sum of all future cash flows discounted back to today at your required rate, minus the initial investment. NPV = Σ (Cash flow ÷ (1+r)^t) − Initial. A positive NPV means the project earns more than your required rate.
What is IRR?▾
The internal rate of return — the discount rate at which NPV equals zero. It is the project's own implied return, useful for comparing opportunities of similar size and duration.
Should I use NPV or IRR to decide?▾
NPV, when they disagree. IRR is a percentage and ignores scale: a small project with a 40% IRR can create less value than a large one at 18%. IRR also misleads when cash flows change sign more than once, which can produce multiple valid rates. Use IRR to communicate, NPV to decide.
What discount rate should I use?▾
Your cost of capital — the blended cost of the debt and equity funding the project — adjusted upward for risk if this project is riskier than your normal work. Using your borrowing rate alone ignores the return equity holders expect.
What does a negative NPV mean?▾
The project returns less than your required rate. It may still be profitable in cash terms; it simply does not clear the bar you set, and the capital would do better elsewhere.
