NPV Explained Simply for BBA Students (With Examples)

<h2>What is NPV Actually?</h2><p>Net Present Value answers one question: is this investment worth it today? It converts future cash flows back to today's value and compares them to what you spend upfront.</p><h2>The Core Idea</h2><p>$100 today is worth more than $100 next year. NPV uses a discount rate to translate future money into today's equivalent.</p><h2>The Formula in Plain English</h2><p>NPV = Sum of (cash flow / (1 + r)^t) − initial investment. Where r is the discount rate and t is the year.</p><h2>Worked Example</h2><p>Invest $1,000. Get $600 in year 1 and $600 in year 2. Discount rate 10%. NPV = 600/1.1 + 600/1.21 − 1000 = 545.45 + 495.87 − 1000 = $41.32. Positive NPV means accept.</p><h2>Decision Rule</h2><p>NPV > 0: accept the project. NPV < 0: reject. NPV = 0: indifferent.</p><h2>Common Exam Mistakes</h2><p>Forgetting year 0 cash flow, using wrong discount rate, mixing up real vs nominal rates.</p>