Financial Management
Net present value
Would you spend ₹1 lakh to receive ₹1.2 lakh next year?
Discount future cash flows into today’s money, then subtract the investment.
NPV = CF₀ + Σ CFₜ / (1 + r)ᵗ
CF₀ is the cash flow today, CFₜ is the cash flow at the end of period t, and r is the discount rate per period. −₹100,000 + ₹120,000 ÷ 1.10 = ₹9,090.91.
At 10%, ₹120,000 next year is worth ₹109,090.91 today. Subtract ₹100,000 to get ₹9,090.91.
CF₀ is the cash flow today, CFₜ is the cash flow at the end of period t, and r is the discount rate per period. −₹100,000 + ₹120,000 ÷ 1.10 = ₹9,090.91.
The discount rate rises to 25%. What should the CFO conclude?