Net Present Value Calculator
About Net Present Value Calculator
What Is Net Present Value?
Net Present Value (NPV) is the cornerstone of capital budgeting. It calculates the difference between the present value of cash inflows and the present value of cash outflows over a period of time. A positive NPV means the investment is expected to generate more value than it costs – in other words, it’s profitable. A negative NPV signals you’d be better off putting your money elsewhere. Every MBA curriculum, every corporate finance team, and every serious investor relies on NPV to make decisions about where to allocate capital.
The NPV Formula
The formula is NPV = sum of [CFt / (1 + r)^t] for t = 0 to n, where CFt is the cash flow at time t, r is the discount rate, and n is the total number of periods. The initial investment is usually a negative cash flow at t = 0. Each subsequent cash flow is discounted back to present value using the discount rate, which represents your required rate of return or the cost of capital.
How to Use This Calculator
Enter your initial investment as a positive number (it will be treated as a cost). Set your discount rate as a percentage. Then add your expected cash flows for each period – you can add up to 20 periods. Click Calculate to see the NPV. If the result is positive, the project clears your required return. The calculator also shows the present value of each individual cash flow so you can see exactly how discounting affects distant cash flows.
Frequently Asked Questions
What discount rate should I use?
Use your cost of capital or required rate of return. For corporate projects, the weighted average cost of capital (WACC) is standard. For personal investments, use the return you could earn on your next best alternative.
What does a negative NPV mean?
A negative NPV means the investment is expected to destroy value. The projected cash flows, when discounted, do not cover the initial cost. You should generally avoid negative NPV investments unless there are strategic reasons beyond financial return.
How is NPV different from ROI?
ROI is a simple percentage that ignores the time value of money. NPV accounts for when cash flows occur, making it more accurate for long-term decisions. A project with a high ROI might still have a negative NPV if most returns come far in the future.
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