You are evaluating a proposed five-year investment for a mid-sized payments company. The finance team wants to upgrade an internal servicing platform that supports customer operations, and the CFO has asked whether the project creates value on a discounted cash flow basis. You have an upfront implementation cost, annual after-tax cash inflows, a terminal recovery value, and the company's hurdle rate. Assume cash flows occur at year-end and use USD.
| Metric | Amount |
|---|---|
| Initial investment (Year 0) | $12,000,000 |
| Year 1 after-tax cash flow | $3,200,000 |
| Year 2 after-tax cash flow | $3,800,000 |
| Year 3 after-tax cash flow | $4,100,000 |
| Year 4 after-tax cash flow | $4,400,000 |
| Year 5 after-tax cash flow | $4,600,000 |
| Year 5 terminal recovery value | $1,500,000 |
| Discount rate | 10% |
How would you calculate the project's NPV and decide whether the company should approve the investment? In your answer, explain why NPV matters for investment decisions and how your recommendation changes under different assumptions.
Discounted cash flow mechanicsTime value of money across multiple periodsRisk-aware investment recommendation