In 2000, Netflix’s founders flew to Dallas and offered to sell the whole company to Blockbuster for $50 million. Blockbuster — 9,000 stores, 60 million customers, $6 billion in annual revenue — reportedly laughed them out of the room, dismissing the “dot-com hysteria.” Blockbuster is now gone; Netflix is worth hundreds of billions. The fatal error wasn’t failing to predict the future. It was valuing an investment by today’s tiny profit instead of the discounted value of tomorrow’s cash.
The Math
Here’s the entire idea behind NPV (Net Present Value): the worth of an investment is the sum of all the cash it will throw off in the future, each amount discounted back to what it’s worth in today’s money. Not this year’s profit — the whole future stream, adjusted for time and risk.
In 2000, Netflix had fewer than 300,000 subscribers and was losing money. On that year’s numbers, $50 million looked absurd. But NPV asks a different question: what is the present value of decades of future subscriber cash flow? And IRR (Internal Rate of Return) asks: what annual return would $50 million earn if those cash flows actually arrived?
Two ways to value the same $50m deal (illustrative)
Blockbuster judged the deal on the wrong number. NPV and IRR exist precisely to prevent that: they force you to value the future cash, discounted, rather than the thin profit of the moment. Run the exercise and a ‘tiny, unprofitable’ company can have an NPV that dwarfs its asking price.
The Nuance
In fairness, nobody had a crystal ball, and plenty of $50m bets never pay off — which is exactly why you discount future cash flows for risk. NPV isn’t fortune-telling; it’s a discipline. It makes you write down the future cash you genuinely believe in and test whether the price is justified. Blockbuster’s real failure was never running the exercise at all — they dismissed it on gut feeling. The tool won’t guarantee you’re right, but it stops you waving away a fortune because it looks small today.Value an Investment the Right Way
Enter an upfront cost, your forecast yearly cash flows and a discount rate to see the NPV and IRR instantly — with three worked examples to copy. Free, private, no sign-up.
Try the NPV & IRR calculator →💬 Your turn
A — I run an NPV/IRR before any big spend.
B — I mostly decide on gut and gut alone.
Drop A or B — and what’s the most jaw-dropping ‘they said no to that?’ missed deal you can think of?
— Maya, who would happily have paid $50 million for Netflix — and, unlike some, would at least have run the numbers first.