Most of the online literature involving NPV and IRR tends to be very academic - defined as tools used to decide if a project is worth pursuing. Consider the set of cash flows below:

The result of "NPV-ing" those cash flows based on a 10% discount rate give $487. But does this mean that the *value of the project is $487*? In the practical sense, how do we then use this analysis and information?

Next consider if we "plug" the 487 back into the set of cash flows as the *initial investment*:

This gives us an **IRR** of 10.0% i.e. paying or investing $487 into this project will allow us to get a return of 10% annualized over the investment horizon.

Therefore, using the discount rate when calculating the NPV allows us to determine what is the ** maximum value** we should be paying for the business i.e. investing anything more than $487 will not allow us to achieve our 10% return. This is one parameter (or boundary) in the negotiation process.

Another parameter here which might not be obvious is whether as an *incoming investor*, do we have the ability or conviction that the projected cash flows will turn out better than expected. All things being equal, using different assumptions for the projected cash flows will result in varying IRRs, which will determine the *entry price* (i.e. the NPV) and hence, also our negotiation strategy in the bidding process.