- Identify Initial Investment: This is the cash outflow at the start (Year 0).
- Estimate Future Cash Flows: Determine how much money the project will bring in or cost each year.
- Determine the Discount Rate: Choose a rate that reflects the risk of the project or the cost of borrowing capital.
- Discount Future Cash Flows: Calculate the present value of each future cash flow using the formula:
=(1+).
- Sum and Subtract: Add all the discounted cash flows together and subtract the initial investment.
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