To compute NPV and apply the NPV rule, follow a five-step process to be used in solving problems:
- Identify all cash inflows and cash outflows.
- Determine an appropriate discount rate (r).
- Use the discount rate to find the present value of all cash inflows and outflows.
- Add together all present values. (From the section on cash flow additivity, we know that this action is appropriate since the cash flows have been indexed to t = 0.)
- Make a decision on the project or investment using the NPV rule: Say yes to a project if the NPV is positive; say no if NPV is negative. As a tool for choosing among alternates, the NPV rule would prefer the investment with the higher positive NPV.
Companies often use the weighted average cost of capital, or WACC, as the appropriate discount rate for capital projects. The WACC is a function of a firm's capital structure (common and preferred stock and long-term debt) and the required rates of return for these securities. CFA exam problems will either give the discount rate, or they may give a WACC.
Read an exampe here: https://www.investopedia.com/exam-guide/cfa-level-1/quantitative-methods/discounted-cash-flow-npv-irr.asp#ixzz4z9IB6j6P/