What is Net Present Value?

You’re planning a new product line. Maybe you’re hiring engineers or expanding into a new market. It feels right, but will it actually make money?

About 82% of startups fail due to cash flow mismanagement. The culprit is usually the same: investments that looked smart on paper, but actually weren’t. This is where net present value (NPV) earns its place. It answers one essential question: Will this investment create real value once you adjust for time, risk, and opportunity cost?

For startups with limited runway and constant tradeoffs, net present value isn’t optional. It’s actually a compass, because it keeps you focused on projects that compound value, not just burn cash faster.

What is Net Present Value (NPV)?

Net present value measures how profitable an investment is by comparing the present value of future cash inflows to what you spend upfront.

The key principle is: a dollar today is worth more than a dollar tomorrow. So NPV discounts future returns back to what they’re worth right now.

When you run the numbers, you’re asking: If I put in money now, what do I get back in present-day cash?

If NPV is positive, the project creates value.
If it’s negative, you lose money.
If it’s zero, you break even.

Timing matters. Money that comes in next year is worth less than money in your pocket today. You could invest that money now and grow it. That’s why two projects with the same total cash return can have completely different NPVs, all because the cash arrives at different times.

The formula for Net Present Value

Here’s the standard NPV formula:

NPV = (Cash Flow₁ / (1 + r)¹) + (Cash Flow₂ / (1 + r)²) + ... + (Cash Flowₙ / (1 + r)ⁿ) - Initial Investment

Where:

Cash flow = money coming in (or going out) each period
r = discount rate (as a decimal)
n = time period (usually in years)
Initial investment = what you pay upfront

For example, let’s say you’re considering a $100,000 investment that returns:

$40,000 in year one
$50,000 in year two
$30,000 in year three

Using a 10% discount rate:

NPV = ($40,000 / 1.10) + ($50,000 / 1.10²) + ($30,000 / 1.10³) - $100,000

NPV = $36,364 + $41,322 + $22,539 - $100,000

NPV = $225

This project breaks even on a present value basis (since NVP is so close to zero). It’s a good idea to seek out stronger opportunities.

For regular annual cash flows, you can use a simple annuity formula. If your cash flows are continuous, use (e-rt) instead of (1 + r)n. But for most startup decisions, the standard formula works.

The discount rate is the lever that moves your calculation the most. Adjust it by just a couple of points and your NPV can swing from positive to negative. Picking the right rate matters.

Why Net Present Value matters for startups

Startups decide where to put resources every day. Should you build feature A or feature B? Hire more engineers or more salespeople? Expand markets or double down? Net present value gives you a framework — not just for evaluating upside, but for timing, risk, and cash discipline.

Unlike ROI, NPV shows when you get paid back, not just how much. A project that pays you in six months isn’t the same as one that takes three years, even if both return the same total. That makes it more relevant to startups, where capital is scarce and time-to-return is critical.

It’s also an investor-friendly metric. When you show your next big move has a positive $2 million NPV, you’re translating strategy into investor-speak. You’re showing clear, systematic thinking about capital allocation — not just chasing growth for its own sake.

NPV shines when you’re deciding whether to scale. Debating a $500,000 marketing campaign? Weigh the NPV of the new customers’ lifetime value against your upfront spend. That number tells you if this campaign is worth it.

Choosing the right discount rate

Your discount rate should capture risk and opportunity cost. For established companies, WACC (weighted average cost of capital) is the common baseline. It’s the average rate you pay to finance your business through debt and equity.

Startups live in a different world. Your cost of capital runs higher because risk runs higher. Here’s what sets your discount rate:

Risk level: higher risk = higher discount rate
Inflation: use a rate above inflation to generate real returns
Alternative investments: what else could you do with the money?
Company stage: early stage startups often use rates of 15–30% or higher

And remember: don’t use just one discount rate for every project. Your main product line expansion might deserve a 15% rate. An experimental, unproven market might need 30% to reflect bigger risks.

When you’re unsure, run a sensitivity analysis. Calculate NPV with different discount rates — say 10%, 20%, and 30%. If your project only works at unreasonably low rates, consider that a signal to look deeper.

How Net Present Value compares to other metrics

Use NPV side by side with other metrics for a full picture.

Internal rate of return (IRR) is NPV’s close relative. While NPV gives you a dollar value, IRR shows you the percentage return. IRR is the discount rate that makes NPV zero. It's great for comparing different-sized projects, but it can mislead if cash flows go in and out multiple times.

Payback period tells you how many years until you recover your initial investment. It’s straightforward, but payback ignores what happens after you break even and skips time value of money. Fast payback with negative long-term NPV isn’t healthy for your business.

ROI (return on investment) is your return as a percent of the upfront spend. Like payback, it skips timing. A 50% ROI over one year is far better than 50% over five years, but standard ROI can’t tell the difference.

Here’s an actionable approach:

Use NPV for your main decision
Check IRR for the return rate
Check payback period to assess liquidity risk

If you need cash fast, a high-NPV project with a five-year payback might not fit. Keep your unique needs in view.

Common pitfalls in Net Present Value (NPV) analysis

Mixing real and nominal values: If your cash flows include inflation, use a discount rate that includes inflation, too. If they’re in today’s dollars, use a real rate. Line these up, or your NPV will mislead you.
Ignoring working capital needs: Need to hold inventory? Offer longer payment terms? These lock up cash and act as negative flows. When you recover that money, it’s positive cash flow again. Include both.
Forgetting taxes or replacements: If your new line means buying new equipment every few years or brings in taxable revenue, factor these in. Leaving them out will inflate your NPV.
Overweighting terminal value: Don’t let far-off projections drive your result. If 80% of your NPV comes from what you expect in year 10, you’re relying on a distant assumption. Be careful and run sensitivity checks on those long-term numbers.
Skipping cannibalization: If your new product takes sales from your old one, only count the additional revenue you’d actually keep.
Using the wrong rate: Match your cash flow type to your discount rate. Discounting equity cash flows? Use the cost of equity. Discounting total cash flows? Use WACC. Stay consistent for accurate valuations.

Small errors in setup can lead to big misreadings of value. So take time to model carefully.

How Runway helps startups with Net Present Value

Good NPV calculations need solid future cash flow forecasts. This is a pain for many startups. Spreadsheets are great, but can get unruly quickly. Important assumptions vanish inside big formulas. Too often, only one person can make sense of the model.

Runway simplifies this by making your financial modeling accessible and collaborative. It gives your team a shared workspace to build forecasts, project expenses, and model headcount — all feeding into your NPV analysis. And when it’s time to calculate net present value, your inputs are already in place — clean, current, and connected. Indie.io cut forecasting variance from 25% to 3% and slashed investor reporting from a week to just 10 minutes with Runway.

Scenario Planning Built for NPV

Runway lets you:

Connect all your data sources with one unified model
Quickly model your base case
Branch different growth, pricing, or cost assumptions
Compare NPVs across multiple scenarios
See which variables move the needle most
Collaborate across teams — marketing inputs CAC, product adds timelines, finance runs the calc

It makes net present value a real-time tool, not a static one. One that updates as you learn, adapt, and evolve.

Everyone works in the same model, so you reduce errors and boost confidence.

How to calculate Net Present Value in Runway

You can build an NPV() function using:

Drivers for cash flow, discount rate, time period
Date functions like dateDiff() and thisMonth()
Formulas to discount cash flows and sum present value

Runway supports full time-series modeling, flexible date ranges, and scenario branching, so you can customize your NPV logic across one project or many.

Here’s a step-by-step guide:

1. Create a place to model NPV

Pick one of these options:

Option A: Create a model called "Investment Evaluation" and add drivers there. Each row is a driver. Models are structured tables designed for this kind of logic.

Option B: On a Page, insert a drivers table block and add drivers inline. You can switch between chart and table views and control time rollups here.

2. Add input drivers

Create these drivers and set their types and formatting:

Discount Rate (Number): Enter as a decimal (e.g., 0.10 for 10%). Format as Percent for readability.
Initial Investment (Number): Enter the upfront cost. You can enter it as a negative (e.g., -100,000) to represent a cash outflow, or as a positive that you'll subtract later. Format as Currency.
Project Start (Date): The start date of your project or cash flow series (e.g., 2025-01-01). You'll use this to compute the period index with dateDiff().

3. Create or reference your Cash Flow driver

For a simple, single-project case, create a "Cash Flow" driver and input your per-period cash flows (monthly or annual). For example, you could enter 40,000, 50,000, and 30,000 in years 1–3, with zeroes elsewhere.

If cash flows already live in a database (like Operating Cash Flow by Project), reference or sum them in a driver formula. For dimensional cash flows, you can segment and compute per project using "This Segment" techniques in database formulas.

4. Pick your discounting cadence

Choose either annual or monthly:

Annual approach: Use your annual discount rate r directly. This works when each cash flow is a year apart.
Monthly approach: Convert r to a monthly rate: r_m = (1 + r)^(1/12) − 1, then discount by the number of months since start.

5. Compute the period index (n)

Add a helper driver called "Period Index" that returns how many periods have elapsed since Project Start.

For annual periods:

Period Index = dateDiff(Project Start, thisMonth(), 'y') + 1

thisMonth() resolves to the current month being evaluated. dateDiff(...,'y') counts whole years between dates.

For months before the project start, use IF() to avoid negative values:

IF(dateDiff(Project Start, thisMonth(),'y') < 0, NULL, dateDiff(Project Start, thisMonth(),'y')+1)For monthly periods:Months Since Start = IF(dateDiff(Project Start, thisMonth(),'m') < 0, 0, dateDiff(Project Start, thisMonth(),'m'))### 6. Build a Discount Factor driver

For annual discounting:Discount Factor = 1 / (1 + Discount Rate) ^ Period Index

For monthly discounting:

Monthly Rate = (1 + Discount Rate) ^ (1/12) - 1Discount Factor = 1 / (1 + Monthly Rate) ^ Months Since Start

7. Calculate Present Value per period

Add a driver called "Present Value":

PV = Cash Flow * Discount Factor

You can protect pre-start periods with an IF() clause if your cash flows extend outside the project window.

8. Aggregate to NPV

You've got two common options:

Option A (Initial Investment as a separate driver):

NPV Total = sum(Present Value Date = [Project Start → Project End]) - Initial Investment

Option B (Initial Investment recorded as a negative cash flow at t=0):

NPV Total = sum(Present Value Date = [Project Start → Project End])

Set date ranges via the formula editor's date range UI. Runway supports date ranges in formulas, including aggregations like sum() over time windows.

Tip: If you're modeling annually, set your Drivers table block to Year rollup so the view and totals align with yearly cash flow timing. Choose the aggregation method (e.g., Sum) so totals reflect accumulated PV and overall NPV.

9. Format

Format Discount Rate as Percent and NPV/Cash Flow/PV as Currency for clarity.

10. Optional: Add scenario analysis

Create scenarios for different discount rates (e.g., Base 10%, Downside 15%, Upside 8%) and compare NPVs side-by-side in a table or chart. Scenarios let you branch assumptions without affecting Main until you choose to merge. You can toggle scenario comparisons in Drivers tables and charts.

11. Optional: Build multi-project or dimensional NPV

If you track multiple projects, segment cash flows by a Project dimension and compute PV per project using database formulas with "This Segment". Then aggregate to portfolio NPV. This keeps the logic scalable and dynamic across projects.

Smarter investment decisions start here

Net present value changes how you think about investing. Instead of gut feels or simple payback math, use a hard framework that captures timing, risk, and opportunity cost. This matters for every major choice you make: product, market, hiring, you name it.

It helps you say:

"This is worth doing now."
"This pays off, but too slowly."
"This doesn’t pay off at all."

And with tools like Runway, you can calculate net present value quickly, collaboratively, and confidently — even as assumptions shift.

See Runway in action.

Make smarter bets with Net Present Value (NPV)