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A five-year contract at ₹10L per year is not worth ₹50L. Discounted at your cost of capital, it is worth measurably less — because money received in year five is worth less than money received today. This is not accounting convention. It is economic reality, and every multi-year procurement decision that ignores it is mispriced.

Why Undiscounted Comparisons Mislead

When a procurement team compares two five-year contracts by their total nominal cost, they are implicitly assuming money has the same value in year five as in year one. This assumption is always wrong — and it systematically biases decisions toward contracts with higher upfront costs and lower future obligations, or toward long-term commitments that appear cheaper in nominal terms but are more expensive in present-value terms.

NPV in Procurement Practice

NPV analysis is mandatory for: any contract exceeding 3 years or ₹25L total value, all lease-vs-buy decisions, any decision involving upfront investment against future savings, and supply chain finance or early payment discount evaluations.

For payment terms specifically, NPV quantifies the precise value of a cash flow difference. Extending payment terms from net-30 to net-60 on ₹10Cr of spend is worth approximately ₹82L in present-value terms at a 10% discount rate — a number that procurement should capture as a working capital improvement in its ROI calculation.

IRR vs NPV: Which to Use

NPV shows the absolute rupee value created. IRR shows the effective annual return. When comparing two projects of similar scale, use NPV. When comparing against your cost of capital hurdle rate, use IRR. When they conflict, NPV is the more reliable criterion — IRR can produce multiple solutions for non-conventional cash flow patterns.

The Inflation Question

Use nominal cash flows with a nominal discount rate, or real cash flows with a real discount rate. Never mix the two. For Indian procurement, nominal rates are typically easier to source and verify. The Government of India 10-year bond yield plus a risk premium is a defensible starting point for any organisation without a published WACC.