Basic Formula:

NPV = cost of the project now + the future cash flows discounted back to today.

To discount future cash flows back to today, you need to break them up into the time periods that you are expecting them to come in at.

For example, if you are planning on selling a new product, that will cost $50,000 today to begin making, and you expect it to make profits of: $5,000 in year 1, $10,000 in year 2, $20,000 in year 3, $25,000 in year 4, and $25,000 in year five, then your cash flows would be:

However, these numbers aren't right, because making $25,000 five years from now is not worth as much $25,000 to you today, because you could take the money today, invest it, and have quite a bit more in five years. To convert these cash flows into what they are worth today, we use a discount rate, also known as the cost of capital. Think of this as the "reverse" of investing money over time!