Investment scenarios: test NPV without inventing probabilities

A positive net present value can turn negative when the assumed cash flows change. Scenario analysis asks which assumptions matter and how much room remains. Labels such as downside, base and upside do not establish probabilities.

Use one consistent model

Keep the currency, start date and horizon consistent. Use net cash flows, including the payments needed to generate receipts. Our fictional EUR example spends €1,000 today and receives cash at the end of each of two years. Residual value is zero. A 5% annual discount rate is an exercise input, not an offered return.

The guide to NPV, IRR and ROI explains the measures. Here NPV provides a common comparison for changing assumptions, rather than a recommendation to buy an asset.

Write down three separate cases

NPV = −1,000 + year-one cash flow / 1.05 + year-two cash flow / 1.05². Calculations retain precision and displayed results round to cents.

Case	Year 1	Year 2	NPV at 5%
Downside	€450	€500	−€117.91
Base	€600	€600	€115.65
Upside	€700	€750	€346.94

These are invented assumptions, not forecasts or statistical intervals. Negative NPV means that the model does not recover the investment at the selected discount rate. The downside’s undiscounted receipts total €950, giving a nominal shortfall of €50, not €117.91. Discounted and nominal differences answer different questions.

Isolate a variable for sensitivity

Keep the base cash flows at €600 each and change only the rate to 10%. NPV becomes €41.32. That isolates the discount-rate effect. Changing both annual flows, as in the downside case, is a combined scenario.

Record a reason for each change: lower quantities, higher operating costs or slower receipts. Do not reduce unrelated inputs by one percentage without explaining why. If price changes also affect sales, acknowledge the dependency rather than treating the inputs as independent.

Find the cash-flow threshold

If both annual flows equal C, zero NPV requires C × (1/1.05 + 1/1.05²) = 1,000. Thus C = €537.804878… per year. The rounded figure is €537.80, but enter €537.81 if checking that cent-rounded cash flows remain just above the threshold.

Compared with €600, the simultaneous proportional decline to the threshold is about 10.37%. This is a sensitivity margin under fixed timing and rate, not a loss probability. It does not cover changes to the initial payment or unexpected later costs.

Run each case in the calculator

Use the NPV, IRR and ROI calculator with annual periods, initial investment 1,000, rate 5 and residual zero. Enter each pair separately, then rerun the base at rate 10. Do not put the same terminal receipt in both the final flow and residual field.

The tool assumes equally spaced periods and end-of-period cash flows. Irregular dates need a dated model. The guide to different annual cash flows explains why averaging away the sequence loses information.

Questions that prevent overconfidence

Can I average the three NPVs as an expected value?

Only justified probabilities summing to one would give a probability-weighted interpretation. Without those, an equal average is another assumption. Show the cases separately rather than presenting the average as evidence.

Is positive NPV enough to approve a project?

No. Check cash availability, capacity, taxes included in the inputs, financing and exposure to uncertain assumptions. NPV does not describe every constraint.

Choose what to investigate

Focus on an assumption that can change the sign and has weak supporting evidence. Seek actual quotes, terms and your own operating data. Keep a case you could finance if receipts arrive late. The useful output is a set of questions and decision limits, not a favourable number treated as a guarantee.