npv
NPV tells you whether the future money a project will bring back is actually worth more than the money you are putting in today.
In plain English
"Bros, this generator business, if I put in ₦2 million now, will I make sense from it?" "Depends. What will it pay you back over the next three years, and is that enough to beat what your money would earn just sitting somewhere else?" That question, right there, is what NPV answers.
NPV stands for Net Present Value. It takes all the money a project will bring in over the years, shrinks each year's amount to what it is really worth today, because money tomorrow is never worth as much as money now, and then subtracts what you spent to start the whole thing.
If the number that comes out is positive, the project is worth doing. If it is negative, you are better off putting your money elsewhere, even if the project sounds exciting at owambe parties or on a WhatsApp group full of hype.
Say a woman in Lagos wants to open a small poultry farm. She needs ₦3,000,000 to start. She expects it to bring in ₦1,200,000 a year for four years. Using a discount rate of 15 percent, because that is roughly what she could earn or what it costs her to borrow, she shrinks each year's ₦1,200,000 down to today's value, adds them up, and subtracts her ₦3,000,000 outlay. If the total comes to a positive ₦242,000, the farm is worth starting.
A diaspora example works too. A man in Manchester sending money to build a small block of flats in Enugu should ask his contractor for projected rental income, then run those numbers through NPV before wiring another kobo, rather than trusting a nice sounding pitch alone.
Companies from Lagos to London use NPV before they commit big money to anything, a new factory, a new branch, a new oil well. It is the calm gatekeeper that separates a genuinely good idea from a good sounding one.
A project needs ₦3,000,000 today and returns ₦1,200,000 yearly for four years. Discounted at 15 percent, those returns are worth about ₦3,242,000 today. Subtract the ₦3,000,000 outlay and NPV is positive ₦242,000, so the project earns more than it costs.
Questions people ask
Why do we shrink future money instead of just adding it up?
Because ₦100,000 today can be invested, spent, or protected from inflation, but ₦100,000 promised in three years might be worth much less by the time it arrives. NPV accounts for that by discounting future cash to today's terms before comparing it with what you spent.
What discount rate should I use for my own small business?
A common approach is to use the return you could reasonably get elsewhere, such as a fixed deposit rate or your cost of borrowing, whichever applies to you. Many Nigerian small business owners use something between 15 and 25 percent given local borrowing costs and inflation.
Is a positive NPV always a guarantee of success?
No. NPV is only as good as the estimates you feed it. If your projected income is too optimistic or your costs are underestimated, a positive NPV can still lead to a project that struggles. Treat it as a strong guide, not a promise.
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