NPV Calculator
The NPV (Net Present Value) Calculator helps you evaluate the profitability of an investment by calculating the present value of all future cash flows minus the initial investment. NPV is a fundamental concept in finance used for capital budgeting, project evaluation, and investment analysis. A positive NPV means the investment is profitable; a negative NPV means it is not. The discount rate used represents the required return or cost of capital. This calculator is essential for making informed business and investment decisions.
Formula
NPV = Σ [CFt ÷ (1 + r)^t] − Initial Investment CFt = cash flow at time t r = discount rate t = time period (1 to n) If NPV > 0, the investment is profitable. If NPV < 0, the investment loses money.
Example
If you invest $10,000 today and expect $3,000, $4,000, $5,000 over 3 years at 10% discount rate: NPV = $3,000/(1.10) + $4,000/(1.10)^2 + $5,000/(1.10)^3 − $10,000 NPV = $2,727 + $3,306 + $3,757 − $10,000 NPV = $9,790 − $10,000 = −$210 Since NPV is negative, this investment is not profitable at 10% required return.
How to Use
- Enter your initial investment amount (as a negative cash flow)
- Enter expected cash flows for each year
- Set your discount rate (required return or cost of capital)
- Review the NPV — positive means profitable, negative means not
- Compare with other investment options using the same discount rate
Frequently Asked Questions
What is the difference between NPV and IRR?
NPV gives the dollar value of an investment's profit/loss. IRR gives the percentage rate of return. NPV is generally preferred for decision-making because it accounts for the scale of the investment and the cost of capital.
What discount rate should I use?
Use your required rate of return or cost of capital. For individuals, this might be 8-10% (expected stock market return). For companies, use the weighted average cost of capital (WACC), typically 8-12%.
What does a negative NPV mean?
A negative NPV means the investment's returns are less than the required rate of return. The investment would destroy value. You should reject investments with negative NPV unless there are strategic reasons.
Can NPV be used for personal finance?
Yes. NPV can evaluate real estate, education, or business investments. For example, calculate the NPV of an MBA: cost (tuition + lost income) vs. future salary increase. If NPV is positive, the investment is worthwhile.
How does the discount rate affect NPV?
A higher discount rate reduces NPV because future cash flows are worth less. A lower discount rate increases NPV. This reflects the time value of money — money today is worth more than money in the future.