Investing · Lesson Plan

NPV Versus Other Investment Models

Net present value isn’t the only way to evaluate an investment — but it has clear advantages. This lesson reviews NPV (the present value of cash inflows minus the initial investment) and compares it to other capital-budgeting models such as payback period and internal rate of return, weighing the strengths and weaknesses of each. Students apply the models to rank competing projects and see why NPV is usually preferred.

Grades 11–12 / College Lesson Plan 45–60 minutes Free Lesson

NPV versus other investment models lesson illustration

For Teachers

Lesson at a glance

Topic: Investing
Grade Level: Grades 11–12 / College
Resource Type: Lesson + Worksheet
Estimated Time: 45–60 minutes
Format: Lesson + worked examples
Materials: Printable lesson, worksheet, pencils

What Students Learn

Learning objectives

Review the NPV investment model
Compare NPV with payback period and IRR
Identify the advantages of the NPV model
Apply each model to competing projects
Explain why NPV is usually preferred

Materials

What you’ll need

Printed lesson and worked examples (one per student)
Financial calculator
Pencils

Key Terms

Vocabulary

Net present value (NPV): Present value of cash inflows minus the initial investment.
Present value: Today’s worth of money to be received in the future.
Payback period: The time it takes to recover an investment’s cost.
Internal rate of return (IRR): The discount rate at which NPV equals zero.
Capital budgeting: Deciding which long-term investments to make.
Mutually exclusive: Projects where choosing one rules out the others.

For Teachers

Lesson plan

Estimated time: one 45–60 minute class period.

Lesson sequence

Review NPV (10 min). NPV = PV of inflows − initial investment; accept if > 0.
Other models (15 min). Payback period and IRR, and how they’re calculated.
Strengths & weaknesses (10 min). Why NPV usually wins among mutually exclusive projects.
Worked examples (13 min). Students rank competing projects with each model.

Assessment

Assess the worked examples for correct calculations and a sound project ranking.

Discussion

Discussion questions

How is NPV calculated, and when do you accept a project?
How does the payback period differ from NPV?
What does IRR tell you?
Why is NPV usually preferred for mutually exclusive projects?
What are the weaknesses of the payback method?

Printable Lesson & Worksheet