Net Present Value (NPV) answers one simple question: after accounting for the time value of money, does this project make us richer or poorer? If ₹1 today is worth more than ₹1 next year (because you could invest it and earn a return), then future cash flows need to be discounted back to today's value before you compare them to what you're spending now.
Here's the rule in plain English: calculate the present value (PV) of all future cash inflows the project will generate, then subtract the initial investment (cash outflow). The result is the NPV. If NPV is positive — accept the project, it adds value to the firm. If NPV is negative — reject it, it destroys value. If NPV = 0, the project exactly earns the required return (usually still acceptable).
The formula is: NPV = Σ [CFₜ ÷ (1 + r)ᵗ] − Initial Investment, where CFₜ is cash inflow in year t, r is the cost of capital (discount rate), and t is the year. For CA Inter, you'll be given either a flat discount rate or a PV factor table (annuity or single-sum). Always use the table values they provide — don't waste time computing (1+r)ᵗ manually in the exam.
NPV is considered the theoretically superior capital budgeting technique because it: (1) considers the time value of money, (2) uses all cash flows over the project's life, and (3) measures absolute wealth creation in rupees — not just a percentage. This is why ICAI examiners contrast it with IRR (which gives a rate, not ₹ value) and Payback Period (which ignores time value entirely). NPV assumes cash flows are reinvested at the cost of capital — a more realistic assumption than IRR's reinvestment rate assumption. This is asked frequently as a 5–8 mark question, often paired with a comparison to IRR or a ranking of two mutually exclusive projects.