Present value analysis.

Net Present Value (NPV) discounts future cash flows back to today's value, then subtracts initial investment. NPV positive = accept, NPV negative = reject. Formula: NPV = Σ(CF_t / (1+r)^t) - Initial Investment. The discount rate r reflects opportunity cost of capital plus risk premium.

Example: 100,000 invested, 25,000 annual cash flow for 5 years, 8% discount rate. PV of cash flows = 99,818. NPV = 99,818 - 100,000 = -182. Marginal reject - barely fails to clear hurdle. Same project at 7% discount: NPV = 2,565 (accept). Discount rate selection critically affects decision.

NPV vs IRR: NPV gives absolute value (£), IRR gives rate (%). Both important. Profitability Index (PI) = PV of cash flows / initial investment - useful for ranking projects when capital constrained. PI > 1 = positive NPV. Choose highest PI projects when can't fund all positive NPV projects. WACC commonly used as discount rate for corporate projects (typically 7-12%).

Quick example

With initial investment of 100,000 and annual cash flow of 25,000 (plus years of 5 years and discount rate of 8%), the result is -182.25. Change any figure and watch the output shift — it's often more useful to see the pattern than to memorise the formula.

Which inputs matter most

You enter Initial Investment, Annual Cash Flow, Years, and Discount Rate %. Not every input has equal weight. Flip one at a time toward extreme values to feel which ones move the needle most for your situation.

What's happening under the hood

NPV = sum of (cash flow_t / (1 + discount rate)^t) for all years, minus initial investment. The formula is listed in full below. If the number looks off, you can retrace the calculation by hand — that's the point of showing the working.

Where this fits in planning

This is a "what-if" tool, not a forecast. Use it to test ideas before committing: what happens if the rate is 2% lower than hoped, what happens if you add five more years. The value is in the scenarios you run, not the single answer you get from the defaults.

What this doesn't capture

Steady-rate math ignores real-world volatility. Actual returns are lumpy; sequence-of-returns risk matters most in drawdown; fees and taxes drag on compound growth; and behaviour changes in drawdowns can reduce outcomes below the projection. Treat the number as one scenario, not a forecast.