Example: Project to create ecommerce website to sell your products online may provide the following cash flow:

Current Year: Initial investment at starting expected to spend $10,000 to develop the website.

Year-1: Eexpected to generate $4,000 in the first year.

Year-2: Expected to generate $5,000 in the second year.

Year-3: Expected to generate $5,000 in the third year

Year-4: Expected to generate $2,000 in the fourth year.

Year-5: Expected to generate $2,000 in the fifth year

Understand your discount rate

Discount rate is the minimum expected rate of investment, based on analyzing other alternate investment options
for the capital. ROR = 10%

Net Present Value calculation = (Cash flow amount) / ((1 + Discount Rate) to the power of number of years)

Scenario-1: Assuming the payment $10,000 as made at the beginning of the year
Year Expected Cash Discounted Cash Flow Value
Flow

Year - 1 $4,000 4,000/(1.1) to power of 1 = $3,636

Year - 2 $5,000 5,000/(1.21) to power of 2 = $4,132

Year - 3 $5,000 5,000/(1.331) to power of 3 = $3,756

Year - 4 $2,000 2,000/(1.464) to power of 4 = $1,366

Year - 5 $2,000 2,000/(1.610) to power of 5 = $1,242

Total NPV = $14,132 - $10,000 = $4,132

Payback Period:

The payback period is how long it will take to recover amount invested in a project

Year Discounted Cash Flow Payback Amount

Value
Year - 1 4,000/(1.1) to power of 1 = $3,636 $3,636

Year - 2 5,000/(1.21) to power of 2 = $4,132 $7,768

Year - 3 5,000/(1.331) to power of 3 = $3,756 $11,524
Year - 4 2,000/(1.464) to power of 4 = $1,366 $12,890
Year - 5 2,000/(1.610) to power of 5 = $1,242 $14,132
Total NPV = $14,132 - $10,000 = $4,132 Payback in 3 years
Initial Investment is of Rs 10000.

Suppose we'd like to make 10% profit on a 3 year project that will initially
cost us $10,000.

a) In the first year, we expect to make $3000

b) In the second year, we expect to make $4300

c) In the third year, we expect to make $5800

Right now, the project is going to cost us $10,000.

So we won't be making any money until at least a year from now.

In other words, ask :

a) How much is that $3000 one year from now worth today?

b) How much is that $4300 two years from now worth today?

c) How much is that 5800 worth three years from now worth today?
ROR is 10%

To get our present values, we use this ROR!

In other words, we ask ourselves:

a) Earning 10%, $3000 one year from today would be worth how much right now?

b) Earning 10%, $4300 two years from today would be worth how much right now?

c) Earning 10%, $5800 three years from today would be worth how much right now