Choosing what to buy
Capital budgeting means deciding which big purchases are worth it — a new oven, a fridge, a second stall. Money today is worth more than money next year, so we compare future earnings to today's cost fairly.
Net Present Value (NPV)
NPV adds up all the future cash a purchase brings, shrinks it to today's value using a discount rate, then subtracts the cost. Positive NPV means the purchase adds value. Negative means it drains value.
A quick example
A fridge costs 900 and brings 300 a year for 5 years. At 15% discount, those 300s are worth less each year further out. If the total discounted cash beats 900, buy it.
A fish seller priced a second-hand freezer at 900 and estimated it would save 25 a month in spoiled stock and add 20 in evening sales. Counting five years at her cost of money, the stream was worth more than the price — she bought it, and it paid for itself in under two years.
A tailor almost bought an embroidery machine because a rival had one. Running the numbers honestly — 1,400 cost, perhaps 30 a month in extra orders — showed the payback stretched past the machine's likely life. She rented embroidery time instead when orders needed it, keeping her cash for fabric.
Practice
A project has an NPV of -120. Should you take it?
No. A negative NPV means it destroys value — you'd get back less than you put in, in today's terms.
Why is money next year worth less than money today?
Because today's money could be used or invested now; waiting has a cost, captured by the discount rate.
Open the NPV & IRR Calculator. Enter a cost of 900 and yearly cash flows of 300. At what discount rate does the NPV turn negative?
As you raise the discount rate, future cash flows shrink; past a certain rate the total dips below 900 and NPV goes negative — that rate is close to the IRR.
Write down a big purchase you're considering, its cost, and the extra yearly profit you honestly expect.
If the discounted profits over its life beat the cost, it adds value. Writing honest numbers stops hope from inflating the answer.
