NPV Case Interview: Everything You Need to Know

Author: Taylor Warfield, Former Bain Manager and Interviewer


NPV case interview


Net Present Value (NPV) shows up in case interviews more often than you'd think. If you're preparing for consulting interviews at top firms, you need to know what NPV is and how it is calculated.

 

I’m a former Bain Manager and I’ll walk you through exactly what you need to know.

 

But first, a quick heads up:

 

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What Is Net Present Value?

 

NPV is the current value of all future cash flows from an investment. It answers a simple question: if a project generates money over time, what is that future money worth today?

 

Here's why this matters. 

 

Getting $100 today is worth more than getting $100 next year. You could invest that $100 today at 10% per year and have $110 next year. So future money needs to be "discounted" to reflect its present value.

 

NPV lets you compare investments on equal footing. 

 

A project that pays out $1 million over five years isn't directly comparable to one that pays $800,000 in two years. NPV converts both to today's dollars so you can make an informed decision.

 

Why Consulting Firms Ask NPV Questions

 

Consulting case interviews test whether you can solve real business problems. NPV questions occasionally show up because consultants use this analysis when advising clients on major decisions.

 

  • Should a company acquire a competitor?

 

  • Build a new factory?

 

  • Launch a new product line? 

 

All of these decisions involve spending money today to generate returns over time. NPV helps answer whether those investments make financial sense.

 

Firms want to see three things when you work through NPV problems:

 

  1. Can you do the math correctly and efficiently? You won't have a calculator, so mental math skills matter.

  2. Do you understand what the numbers mean? Calculating NPV is pointless if you can't interpret the results and explain them clearly.

  3. Can you use NPV within a broader business context? The calculation is just one piece of making a recommendation. You need to consider qualitative factors too.

 

Where NPV Shows Up in Case Interviews

 

NPV appears in several types of case interviews. Here are the most common scenarios you'll face.

 

Merger & Acquisition Cases

 

Should your client acquire a competitor? The interviewer might give you projected cash flows for the target company and ask if the acquisition price makes sense.

 

Your task is to calculate the NPV of those future cash flows and compare it to the asking price. If NPV is higher than the price, it's a good deal. If NPV is lower, the target is overpriced.

 

Remember to consider synergies. Acquiring a company often creates additional value through cost savings or revenue growth. You might need to add synergy value to the base NPV.

 

New Product Launch Cases

 

A company wants to launch a new product. They'll invest upfront in development and marketing, then generate sales over time. Should they proceed?

 

Calculate the NPV of expected future revenues minus costs. If NPV is positive, launch the product. If negative, don't.

 

Watch for the time horizon. Products don't generate revenue forever. A tech product might have a three-year lifecycle before becoming obsolete. Only include realistic time frames in your calculation.

 

Capital Investment Cases

 

Should a manufacturer build a new factory? Should a retailer open new stores? These capital-intensive decisions live and die by NPV analysis.

 

You'll typically get an upfront investment cost and projected annual profits. Calculate whether those future profits justify today's investment.

 

Don't forget that capital investments often require ongoing costs. A factory needs maintenance. A store needs staff. Make sure you're using net cash flow, not just revenue.

 

Private Equity and Valuation Cases

 

How much should an investor pay for a company? What's a business worth? These cases are essentially NPV calculations dressed up differently.

 

Calculate the present value of all future cash flows the business will generate. That's the maximum price a rational buyer should pay.

 

In PE cases, you might also need to consider exit value. A private equity firm typically holds a company for 3-5 years then sells it. You'd calculate NPV of cash flows during the holding period plus the NPV of the expected sale price.

 

The NPV Formula and What It Means

 

The basic NPV formula looks like this:

 

NPV = (CF₁ / (1 + r)¹) + (CF₂ / (1 + r)²) + (CF₃ / (1 + r)³) + ... + (CFₙ / (1 + r)ⁿ)

 

Where:

 

  • CF = Cash flow in each period
  • r = Discount rate
  • n = Number of periods

 

Let me break this down with a real example. 

 

Let’s say a company invests $500,000 today to launch a new product. The product will generate $200,000 in year one, $250,000 in year two, and $300,000 in year three. The discount rate is 10%.

 

  • Year 1: $200,000 / (1.10)¹ = $181,818
  • Year 2: $250,000 / (1.10)² = $206,612
  • Year 3: $300,000 / (1.10)³ = $225,394

 

Total NPV = $181,818 + $206,612 + $225,394 - $500,000 = $113,824

 

The positive NPV of $113,824 means this investment creates value. The company should proceed.

 

If NPV were negative, the project destroys value. The company would be better off investing that money elsewhere or returning it to shareholders.

 

The Discount Rate: What It Is and How to Choose It

 

The discount rate is probably the trickiest part of NPV for case interview candidates. It represents the cost of capital or the return you could get from alternative investments.

 

Think of it this way. 

 

If you can safely earn 5% by putting money in bonds, why would you invest in a risky project unless it returns more than 5%? The discount rate accounts for this opportunity cost and risk.

 

In case interviews, you'll usually face one of three situations:

 

1. The interviewer gives you the discount rate. This is the easiest scenario. Just use the number they provide and move on with your calculation.

 

2. The interviewer expects you to ask for it. If the case involves valuation or investment analysis and they haven't mentioned a discount rate, ask. Say something like "What discount rate should I use for this analysis?" 

 

Most interviewers will give you a reasonable number.

 

3. You need to estimate it yourself. This is rare but possible. Use these guidelines:

 

  • Low-risk, stable companies: 3-5%
  • Medium-risk companies: 5-10%
  • High-risk ventures or startups: 10-20% or higher

 

For most case interviews, 10% is a safe default assumption if you need to pick a number. It's round, easy to work with mentally, and falls in the reasonable range for corporate investments.

 

The discount rate reflects risk. 

 

Riskier projects require higher discount rates because investors demand higher returns to compensate for uncertainty. A guaranteed government bond might use 3%, while a speculative tech startup might use 20% or more.

Simplified NPV for Case Interviews

 

Here's the good news. 

 

You almost never need to calculate full multi-year NPV by hand in case interviews. The math gets messy fast, and interviewers know you don't have a calculator.

 

Instead, you'll use simplified versions. Master these shortcuts and you'll handle 95% of case interview NPV questions.

 

1. The Perpetuity Formula

 

If a business generates stable cash flows forever, use this simple formula:

 

NPV = Annual Cash Flow / Discount Rate

 

Example: A company generates $100,000 per year indefinitely. The discount rate is 10%.

 

NPV = $100,000 / 0.10 = $1,000,000

 

This means the business is worth $1 million today based on its future cash flows.

 

This formula works because it accounts for cash flows continuing forever. It's incredibly useful for valuing mature, stable businesses.

 

2. The Perpetuity with Growth Formula

 

If cash flows grow at a constant rate each year, add growth to the formula:

 

NPV = Annual Cash Flow / (Discount Rate - Growth Rate)

 

Example: A company generates $100,000 this year and grows 2% annually forever. The discount rate is 10%.

 

NPV = $100,000 / (0.10 - 0.02) = $100,000 / 0.08 = $1,250,000

 

The 2% growth significantly increases the company's value from $1 million to $1.25 million.

 

Be careful with this formula. The growth rate must be lower than the discount rate, otherwise the math breaks down. No company can grow faster than the discount rate forever.

 

3. The Payback Period Approach

 

Sometimes interviewers just want to know when an investment pays for itself. This isn't technically NPV, but it's related and useful.

 

Example: A private equity firm wants to buy a company for $5 million. The company generates $1 million in free cash flow annually. When does the firm recoup its investment?

 

$5 million / $1 million per year = 5 years

 

Simple. The investment pays back in five years. If the firm wants their money back in three years, this deal doesn't work.

 

This approach ignores the time value of money, but it's quick and often sufficient for initial screening in case interviews.

 

Common NPV Mistakes to Avoid

 

When dealing with NPV in your case interviews, avoid making these common mistakes. One math error can be the difference between a consulting offer and rejection.

 

1. Forgetting the Initial Investment

 

NPV must account for the upfront cost. If a project costs $1 million and generates $800,000 in present value, the NPV is negative $200,000, not positive $800,000.

 

Always subtract initial investment from the sum of discounted future cash flows.

 

2. Using Revenue Instead of Cash Flow

 

NPV requires cash flow, not revenue. Revenue is what customers pay you. Cash flow is what actually hits your bank account after expenses.

 

If an interviewer gives you revenue, ask about costs. If they say to assume certain profit margins, use those to convert revenue to cash flow.

 

3. Mixing Up the Time Periods

 

Make sure your discount rate matches your time periods. If you have annual cash flows, use an annual discount rate. If you have quarterly cash flows, adjust accordingly.

 

Most case interviews use annual periods, but double-check to be safe.

 

4. Overcomplicating the Math

 

Interviewers give you round numbers for a reason. They want to see if you can do mental math efficiently, not whether you can execute complex calculations.

 

If cash flows are $200,000, $300,000, and $400,000, the interviewer chose those numbers deliberately. Don't invent messy numbers.

 

5. Ignoring Qualitative Factors

 

NPV is just a number. Don't recommend an investment solely because NPV is positive.

 

Maybe NPV is positive but tiny, meaning other investments would create more value. Maybe NPV is positive but the project is risky, with high uncertainty in the cash flow projections. Maybe NPV is positive but executing the project would distract from the company's core business.

 

Always wrap your NPV analysis in broader strategic context. The interviewer wants to see you think like a consultant, not just a calculator.

 

NPV Case Interview Practice

 

The best way to master NPV is through practice. Work through these problems to build your skills and confidence.

 

Practice Problem 1: Basic NPV Calculation

 

A retail company is considering opening a new store. The initial investment is $800,000. The store will generate the following cash flows:

 

  • Year 1: $250,000
  • Year 2: $300,000
  • Year 3: $350,000
  • Year 4: $400,000

 

The discount rate is 10%. Should the company open the store?

 

Solution:

 

Calculate the present value of each year's cash flow:

 

  • Year 1: $250,000 / 1.10 = $227,273
  • Year 2: $300,000 / 1.21 = $247,934
  • Year 3: $350,000 / 1.331 = $262,989
  • Year 4: $400,000 / 1.4641 = $273,205

 

Total PV = $227,273 + $247,934 + $262,989 + $273,205 = $1,011,401

 

NPV = $1,011,401 - $800,000 = $211,401

 

Yes, the company should open the store. The positive NPV of $211,401 means the investment creates value.

 

Problem 2: Perpetuity Valuation

 

A private equity firm is evaluating a mature logistics company. The company generates stable annual cash flows of $5 million with no expected growth. The required return is 12%. What is the maximum price the PE firm should pay?

 

Solution:

 

Use the perpetuity formula: NPV = Annual Cash Flow / Discount Rate

 

NPV = $5,000,000 / 0.12 = $41,666,667

 

The maximum price is approximately $41.7 million. Paying more would result in a negative NPV and destroy value.

 

Problem 3: Acquisition with Synergies

 

Your client wants to acquire a competitor for $15 million. The target company generates $2 million in annual cash flows. The acquisition would create $500,000 in annual cost synergies. The discount rate is 10%. Assume cash flows continue indefinitely. Should your client proceed?

 

Solution:

 

Total annual cash flow = $2,000,000 + $500,000 = $2,500,000

 

Using the perpetuity formula:

 

NPV = $2,500,000 / 0.10 = $25,000,000

 

Compare to acquisition price: $25,000,000 - $15,000,000 = $10,000,000

 

Yes, proceed with the acquisition. The NPV is positive $10 million, meaning the company is worth $25 million but only costs $15 million.

 

Problem 4: Growing Perpetuity

 

A software company generates $8 million in annual free cash flow. Cash flows are expected to grow 3% annually forever. The discount rate is 11%. What is the company worth?

 

Solution:

 

Use the growing perpetuity formula: NPV = Cash Flow / (Discount Rate - Growth Rate)

 

NPV = $8,000,000 / (0.11 - 0.03) = $8,000,000 / 0.08 = $100,000,000

 

The company is worth $100 million based on its future cash flows.

 

Problem 5: Comparing Two Projects

 

A manufacturing company must choose between two projects. They can only pursue one due to capital constraints.

 

  • Project A: Invest $2 million today. Generate $700,000 annually for 5 years.
  • Project B: Invest $1.5 million today. Generate $500,000 annually for 5 years.

 

The discount rate is 10%. Which project should the company choose?

 

Solution:

 

For simplicity, approximate using the perpetuity formula for 5 years (in reality, you'd calculate each year, but this gives a quick estimate):

 

  • Project A approximate value: $700,000 / 0.10 = $7,000,000 
  • Project A NPV ≈ $7,000,000 - $2,000,000 = $5,000,000


  • Project B approximate value: $500,000 / 0.10 = $5,000,000
  • Project B NPV ≈ $5,000,000 - $1,500,000 = $3,500,000

 

Choose Project A. While both have positive NPVs, Project A creates more total value: $5 million vs. $3.5 million.

 

Problem 6: Make vs. Buy Decision

 

A technology company needs a new component for its product. They can either:

 

  • Option 1 (Make): Build manufacturing capacity for $10 million. Production costs will be $2 million annually.
  • Option 2 (Buy): Purchase components from a supplier for $3.5 million annually.

 

Assume a 10-year time horizon and a 10% discount rate. Which option should the company choose?

 

Solution:

 

This requires comparing total costs in present value terms.

 

Option 1 (Make):

 

  • Initial investment: $10 million
  • Annual costs: $2 million for 10 years
  • PV of annual costs ≈ $2 million / 0.10 = $20 million (using perpetuity as approximation)
  • Total ≈ $30 million

 

Option 2 (Buy):

 

  • Annual costs: $3.5 million for 10 years
  • PV of annual costs ≈ $3.5 million / 0.10 = $35 million

 

Choose to make (Option 1). The total present value cost is approximately $30 million vs. $35 million for buying. Making it in-house saves about $5 million in present value terms.

 

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