What is NPV
Net Present Value (NPV) is the sum of all discounted future cash flows from a project, minus the initial investment. The discount rate (typically WACC) converts future cash to present value, accounting for time value of money and risk.
Where:
- CF_t = net cash flow in year t (revenue minus opex)
- r = discount rate (typically WACC)
- T = project life
Positive NPV indicates the project creates value (returns exceed cost of capital). Negative NPV indicates value destruction. Zero NPV indicates exactly meeting cost of capital.
For Indian solar projects, NPV is one of the primary investment metrics alongside IRR. NPV provides absolute value of project worth, while IRR provides percentage return. Together they fully characterise project economics, alongside LCOE, which converts the same discounted cash flows into a per-unit cost of energy.
Why NPV matters
Investment decision. Go/no-go on project investment.
Value creation. Positive NPV creates shareholder value.
Comparison. Direct comparison of project values.
PPA bidding. Tariff that produces NPV ≥ 0 at WACC.
Capital allocation. Within portfolios, highest NPV projects prioritised.
NPV calculation example
For a 1 MW Indian utility solar project:
| Year | Cash Flow (₹ lakh) | Discount factor (10%) | Present value |
|---|---|---|---|
| 0 (capex) | -400 | 1.000 | -400 |
| 1-25 (operating) | ~37 per year | varies | 335 |
| NPV | -65 |
Technical deep dive
NPV components for solar
| Component | Cash flow direction |
|---|---|
| Capex | Outflow (year 0) |
| Annual revenue (PPA) | Inflow |
| Annual O&M | Outflow |
| Annual debt service | Outflow |
| Annual tax | Outflow |
| Terminal value (year 25) | Inflow |
| Decommissioning cost (year 25) | Outflow |
Sensitivity to key inputs
For Indian utility solar:
| Input change | NPV impact |
|---|---|
| +10% capex | NPV reduces by 8-10% |
| +10% yield | NPV increases by 12-15% |
| +₹0.25/kWh tariff | NPV increases by 15-18% |
| -0.5% WACC | NPV increases by 8-12% |
| +1% degradation | NPV reduces by 5-8% |
NPV vs IRR
| Aspect | NPV | IRR |
|---|---|---|
| Output | Currency | Percentage |
| Use | Value scale | Return rate |
| Threshold | NPV > 0 | IRR > WACC |
| Robust to | Multiple scenarios | Sign changes |
| Equity vs debt | All | Often equity |
Time value of money
Cash flow in year 25 at 10% WACC: PV = Future Cash Flow / (1.10)^25 = Future / 10.83
A ₹100 cash flow in year 25 is worth only ₹9.23 today at 10% WACC. For a full worked example of IRR and payback alongside NPV on an Indian C&I project, see Solar IRR and Payback for C&I in India, Real Math.
Real-world applications
Project investment decisions, often cross-checked against the simpler payback period metric that smaller C&I buyers understand more intuitively.
PPA tariff floor setting.
Solar plant acquisition pricing.
Investment portfolio ranking.
Sustainability investment screening.
Best practices
Use realistic yield (P50 for planning, P90 for risk).
Apply correct WACC.
Include degradation in annual cash flows.
Document all assumptions transparently.
Conduct sensitivity analysis, for example using SurgePV’s generation and financial modelling tool.
Report both NPV and IRR.
Indian market context
NPV-based decisions standard across Indian solar industry.
Bankers (SBI, Canara, REC, PFC, IREDA) use NPV in credit approval.
SECI tender bid decisions consider NPV at target WACC.
PE/VC funding decisions for solar startups based on NPV models.
Major Indian solar developers (Adani Green, ReNew, Tata Power Renewables) report NPV-based portfolio metrics.
Standards and certifications
| Standard | Scope |
|---|---|
| Standard DCF methodology | Globally recognised |
| CERC Tariff Regulations | Indian framework |
| Bank credit appraisal standards | Lender practice |
Key takeaways
NPV is the sum of discounted future cash flows minus initial investment. Positive NPV creates value; negative destroys it. Indian solar NPV depends on capex, opex, yield, tariff and WACC assumptions. Used alongside IRR for complete project economic analysis. PPA tariff bidding sets minimum tariff at NPV ≥ 0 at target WACC. Sensitivity analysis quantifies risk to key inputs.
Further reading
For how NPV plays out in real projects, these guides go deeper:
- Solar Financial Modeling Software 2026 Guide
- Solar IRR and Payback for C&I in India, Real Math
- LCOE of Solar in India: ₹4.8/kWh for a 50 kW C&I Plant
- Solar CAPEX vs OPEX: Which Model Fits Your Business?
Sources
- Brealey R., Myers S., Allen F., Principles of Corporate Finance, McGraw-Hill.
- CERC Tariff Regulations 2024.
- IREDA Project Appraisal Methodology.
- NREL System Advisor Model (SAM).
- IRENA Renewable Project Finance.
- IFC Solar Project Appraisal Tools.
- BloombergNEF investment analysis.
- IEA Project Finance for Renewables.
- Indian Banks Association financing guidelines.
Frequently Asked Questions
What is NPV in simple words?
What is the formula?
When is NPV positive?
What discount rate?
Does NPV decide investment?
NPV vs IRR?
Does NPV include degradation?
What is the typical NPV for Indian utility solar?
Does NPV change with assumptions?
Is NPV after tax?
What is terminal value?
Is NPV used in LCOE?
How does NPV inform PPA bidding?
Does NPV ignore later cash flows?
Is NPV bankable?
From the Blog
Co-founder & CEO driving Qbits Energy's product strategy and growth across India.