3.8.2 (HL)—Net present value

Net present value is the total of discounted future net cash flows minus the initial investment. Discounting reflects that money received later has a lower present value and that today’s funds could have been used elsewhere.

Multiply each future net cash flow by its discount factor, add the discounted values including the negative initial outlay, then interpret the sign. A positive NPV suggests value at the chosen rate; a negative NPV suggests the forecast return does not cover that opportunity cost.

For a £325,000 project with discounted future inflows of £100,100, £74,400, £56,250, £44,200 and £37,200, the total including the initial outlay is −£12,550. That is a warning under the 10% discount rate, not a guarantee that every non-financial benefit is worthless.

NPV depends on forecast cash flows and the discount rate. It can ignore environmental or strategic value and become misleading when assumptions are weak; show units, timing and sensitivity before accepting the result.