NPV (Net Present Value)

NPV (Net Present Value) is calculated as: NPV = Σ CFt / (1 + r)ᵗ — t=0 to n, where CFt is the cash flow in year t, r is the discount rate (required rate of return or WACC), and n is the project life in years. A positive NPV means the project earns more than the discount rate — it creates value. A negative NPV means the project destroys value at the given discount rate. NPV is expressed in absolute rupee terms (unlike IRR, which is a percentage), making it useful for comparing mutually exclusive projects of different sizes: a project with NPV of Rs 2 crore creates more rupee value than one with NPV of Rs 50 lakh, even if the smaller project has a higher IRR.

Choosing the discount rate for Indian recycling projects: typically the WACC (Weighted Average Cost of Capital) — a blend of the cost of equity (what promoters and investors expect, usually 18–25% for Indian MSME recycling projects) and the cost of debt (term loan interest, currently 10–13.5% for non-priority sector loans, 8.5–11% under priority sector lending). For a 70:30 debt:equity project with 12% debt cost and 20% equity cost, WACC ≈ 0.7×12% + 0.3×20% = 14.4%. Using a discount rate below WACC makes projects appear more attractive than they are — a common distortion in promotional DPRs.

NPV and IRR are companion metrics: if IRR > discount rate, NPV > 0. The two metrics sometimes rank projects differently — a high-IRR, small-scale project may have a lower NPV than a lower-IRR, large-scale project. For an entrepreneur choosing between a 500 TPD line and a 200 TPD line, NPV comparison tells you which creates more total wealth; IRR comparison tells you which earns a higher percentage return on each rupee invested. For lenders, neither metric is primary — DSCR and loan repayment profile are — but both appear in the DPR's financial summary.

For Indian recycling project NPV modelling, the key inputs that dominate output sensitivity: (1) output price trajectory — model rPET pellet or pyrolysis oil prices as flat (conservative), 2% annual inflation, or 4% annual growth and see the NPV spread; (2) feedstock cost — model 0% (EPR-funded waste), Rs 5/kg, and Rs 12/kg scenarios; (3) capacity utilisation ramp — 55% Year 1, 72% Year 2, 85% Year 3+ is a realistic base case. Present NPV at the base case discount rate with a tornado chart showing which variable moves NPV the most — this tells investors where the project's real risk lies.