💵Capital Budgeting Formulas

Net Present Value (NPV)

Σ (Cash Flow ÷ (1 + r)^n) - Initial Investment = NPV

What It Means

The value of future cash flows in today's dollars.

✓Accept if NPV > 0

Initial Investment:$100,000

Year 1 Cash Flow:$40,000

Year 2 Cash Flow:$50,000

Year 3 Cash Flow:$60,000

Discount Rate:10%

PV of cash flows - $100,000

NPV = $24,342 (positive)

→ Project adds value—accept it

Initial Investment ÷ Annual Cash Inflow = Payback Period (years)

Average Annual Net Income ÷ Average Investment × 100 = ARR %

1 ÷ (1 + r)^n

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