NPV (Net Present Value) sums all future cash flows discounted to today. If NPV > 0, the project creates value. NPV is the gold standard for investment decisions because it accounts for both the time value of money and the risk of the project.
NPV
NPV = Σ [CF_t / (1+r)^t] - Initial Investment
CF_t = cash flow in year t, r = discount rate.
Key Takeaways
- NPV > 0 = project creates value. NPV < 0 = destroys value.
- Use 15-25% discount rate for startup projects.
- NPV is the gold standard for investment decisions.
- Negative early cash flows are normal for startups.