Today I impart the most important takeaway ever from Finance or Financial Management. Always do a project if the Net Present Value is positive. It represents the culmination of a project cost calculation that includes the time value of money and the likelihood of different outcomes, and spits out a value for the project that you can use to objectively compare it to other projects (if you have limited funds).
Net Present Value (NPV) is a financial calculation used to determine whether to pursue a project. NPV takes into account everything (if possible) about the project. You need to quantify reward and financial outlay, of course. But you also need to consider the risk of a project not meeting your projections. In a simplified example, if you have a 50% chance to win $1 million and a 50% chance to lose $1 million, rationally, the chance would be worth exactly $0. That evaluation needs to be done with a person's risk tolerance in mind, too. While rationally that chance is worth nothing, a someone with a high risk tolerance may believe that the possible reward is worth the possible loss.
All financial projections have flaws. I learned about several of them. But the model with the LEAST flaws is NPV. This calculation is the way a numbers-oriented manager chooses new projects. There are underlying assumptions that must be stated when doing the calculation, but if you only make conservative assumptions, the calculation is defensible and persuasive.
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