Jinsi ya kukokotoa NPV

NPV ni nini?

Net Present Value (NPV) sums all future cash flows discounted to today's value minus the initial investment. Positive NPV means the investment creates more value than it costs.

Fomula

NPV = Σ [Cₜ / (1+r)ᵗ] − C₀; If NPV > 0, project is value-accretive

C₀: Initial investment (outflow) (Currency)
Cₜ: Cash inflow in period t (Currency)
r: Discount rate (Annual percentage)
t: Time period (Years)

Mwongozo wa Hatua kwa Hatua

1NPV = Σ Cₜ/(1+r)ᵗ − Initial investment
2r = required discount rate (cost of capital)
3NPV > 0: invest; NPV < 0: reject
4Higher discount rate → lower NPV

Mifano Iliyotatuliwa

Ingizo

−$50k initial, $15k/yr for 5yr, 10% discount rate

Matokeo

NPV = +$6,862 → invest

Maswali yanayoulizwa mara kwa mara

How do I choose the discount rate?

Use your weighted average cost of capital (WACC) or hurdle rate. 10% for stocks, 5–8% for real estate, 3–5% for bonds. Higher rate = stricter NPV test.

What does negative NPV mean?

Project doesn't meet your return threshold. In theory, reject it. In practice: real-world factors (strategic, competitive, optionality) may justify it anyway.

Does NPV account for risk?

Partially, via discount rate. Higher risk = higher discount rate = lower NPV. But NPV doesn't handle big downside scenarios—use scenario analysis + NPV together.

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