Let’s first try to understand what this question means. For instance consider the below investment shown in figure ‘NPV in action’. We have made an investment plan of 10,000 and then in the first year we predict to get 2000, in second year 4000 and so on. The total profit we predict to get is 34000 at the end of the investment plan. Before we move ahead to implement this business investment we would like to analyze , what if we put the same in fixed deposit at 5% rate will it be better than this business plan. The answer is to use the NPV function. Below figure shows how we have used ‘NPV’. One of the important points to be noted is we have not taken the investment amounts. By using NPV we get 28227. That means to get the same return we would need to invest 28227 in fixed deposit. The same we are getting by only investing 10000, which means this business plan, is better than 5% fixed deposit plan.
Figure: - NPV in action
Note: - Some times NPV and IRR can be very misleading. They are estimates and not actuals. So please do recheck yourself the results before implementing the same.