1️⃣ What is Net Present Value (NPV)?

Net Present Value (NPV) is a financial evaluation method used to determine the profitability of a project by considering the time value of money.

It answers:

“What is the present value of future cash flows after deducting the initial investment?”

Unlike ROI, NPV accounts for the fact that ₹1 today is worth more than ₹1 in the future.

---

2️⃣ Concept of Time Value of Money

Money received in the future must be discounted because:

• Inflation reduces purchasing power
• Money has opportunity cost
• There is risk involved

Therefore, future cash flows are converted to present value.

---

3️⃣ NPV Formula

$$NPV = -C_0 + \sum \frac{C_t}{(1+r)^t}$$NPV=−C0​+∑(1+r)tCt​​

Where:

• $C_0$C0​ = Initial investment
• $C_t$Ct​ = Cash inflow in year $t$t
• $r$r = Discount rate
• $t$t = Time period

---

4️⃣ Decision Rule

• If NPV > 0 → Accept the project
• If NPV < 0 → Reject the project
• If NPV = 0 → Break-even

---

5️⃣ Importance of NPV in Architecture & Planning

NPV is widely used in:

• Real estate feasibility studies
• Urban infrastructure projects
• Metro and transport projects
• Sustainable building investments
• PPP projects
• Smart city development

It helps planners evaluate long-term economic viability.

---

6️⃣ Step-by-Step Numerical Example

---

✅ Example 1: Commercial Building Project

Initial Investment (Year 0)

₹1,00,000

Expected Cash Inflows:

Year 1 = ₹60,000
Year 2 = ₹60,000

Discount Rate = 10%

---

Step 1: Discount Year 1 Cash Flow

$$PV_1 = \frac{60,000}{1.10}$$PV1​=1.1060,000​ $$PV_1 = 54,545$$PV1​=54,545

---

Step 2: Discount Year 2 Cash Flow

$$PV_2 = \frac{60,000}{1.10^2}$$PV2​=1.10260,000​ $$PV_2 = 49,587$$PV2​=49,587

---

Step 3: Calculate Total Present Value

$$Total\ PV = 54,545 + 49,587$$Total PV=54,545+49,587 $$Total\ PV = 1,04,132$$Total PV=1,04,132

---

Step 4: Calculate NPV

$$NPV = 1,04,132 – 1,00,000$$NPV=1,04,132−1,00,000 $$NPV = ₹4,132$$NPV=₹4,132

👉 Since NPV is positive, the project is financially acceptable.

---

7️⃣ Example 2: Urban Parking Facility

Initial Investment = ₹2,50,00,000

Annual Net Cash Flow = ₹40,00,000
Project Life = 5 years
Discount Rate = 12%

Using discount formula:

Year 1:

$$40,00,000 / 1.12 = 35,71,429$$40,00,000/1.12=35,71,429

Year 2:

$$40,00,000 / 1.12^2 = 31,88,776$$40,00,000/1.122=31,88,776

Year 3:

$$40,00,000 / 1.12^3 = 28,47,120$$40,00,000/1.123=28,47,120

Year 4:

$$40,00,000 / 1.12^4 = 25,41,179$$40,00,000/1.124=25,41,179

Year 5:

$$40,00,000 / 1.12^5 = 22,69,803$$40,00,000/1.125=22,69,803

---

Total Present Value of Benefits:

≈ ₹1,44,18,307

---

NPV Calculation:

$$NPV = 1,44,18,307 – 2,50,00,000$$NPV=1,44,18,307−2,50,00,000 $$NPV = -₹1,05,81,693$$NPV=−₹1,05,81,693

👉 Negative NPV → Project not viable at 12% discount rate.

---

8️⃣ Applications in Planning

---

🔹 1. Transit-Oriented Development (TOD)

Used to assess:

• Increased land value
• Rental growth near transit
• Long-term commercial viability

---

🔹 2. Infrastructure Projects

• Metro rail
• Bus terminals
• Multi-modal hubs
• Flyovers

---

🔹 3. Sustainable Building Projects

• Solar energy systems
• Green roofing
• Energy-efficient retrofitting

---

🔹 4. Public-Private Partnership (PPP)

NPV helps determine:

• Financial feasibility
• Concession duration
• Revenue sharing models

---

9️⃣ Advantages of NPV

✔ Considers time value of money
✔ Measures absolute profit
✔ Suitable for long-term projects
✔ Reliable for infrastructure evaluation
✔ Widely accepted in financial analysis

---

🔟 Limitations

❌ Requires selection of discount rate
❌ Complex compared to ROI
❌ Sensitive to future cash flow estimation
❌ Hard to monetize social benefits

---

11️⃣ Difference Between ROI and NPV

ROI	NPV
Percentage measure	Absolute monetary value
Ignores time value	Considers time value
Simple	More accurate
Short-term focus	Long-term focus

---

12️⃣ Conclusion

Net Present Value (NPV) is one of the most important financial tools in architecture and urban planning. It allows planners and architects to:

• Evaluate long-term project feasibility
• Compare alternative design options
• Assess infrastructure viability
• Support sustainable development decisions
• Strengthen Detailed Project Reports (DPRs)

NPV ensures that planning decisions are economically sound, financially sustainable, and aligned with long-term urban growth strategies.