How is NPV calculated?
NPV sums all the project's future cash flows, discounted to present value with a rate that reflects opportunity cost and risk. Then it subtracts the initial investment.
I₀ = initial investment · Fₜ = year-t cash flow · i = discount rate (MARR) · n = horizon in years.
Worked example
A coffee shop needs $100,000 of initial investment. It projects a net flow of $30,000 per year for 5 years. The owner requires a 15% MARR.
NPV = −100,000 + 30,000/(1.15)¹ + 30,000/(1.15)² + 30,000/(1.15)³ + 30,000/(1.15)⁴ + 30,000/(1.15)⁵
NPV = −100,000 + 26,087 + 22,684 + 19,725 + 17,152 + 14,914 = +$562
NPV is positive but tight: the project covers the 15% MARR and leaves $562 extra in present value. Any CAPEX overrun or revenue shortfall flips it negative — a sensitive project.
3 common mistakes when computing NPV
1.Underestimating MARR
A very low MARR (8–10%) makes almost any project look positive. For SMBs in Latam, a realistic MARR is 18–25% — reflecting risk + the opportunity cost of a dollar-denominated fixed deposit.
2.Forgetting working capital
Initial CAPEX isn't only equipment: include 2–3 months of fixed costs as working capital. Without that buffer, year-1 cash flow goes negative and NPV drops by half.
3.Assuming uniform flows for projects with ramp-up
A new business invoices little in year 1 and grows later. This calculator assumes a constant flow — for higher precision use the full dashboard, which lets you load year-by-year flows.
Frequently asked questions
- The most-used rate is the investor's MARR: the minimum they require to earn. For Latam SMBs, typical values are 18–25%. If you take debt, use WACC. If you invest your own equity, use your opportunity cost.