NPV Calculator
Calculate Net Present Value (NPV) to evaluate whether an investment or project will be profitable. NPV discounts future cash flows back to their present value using a required rate of return, then subtracts the initial investment cost.
What is Net Present Value (NPV)?
Net Present Value is a financial metric that calculates the difference between the present value of cash inflows and the present value of cash outflows over a period of time. It is used in capital budgeting and investment planning to analyze the profitability of a projected investment or project.
NPV Formula
Where: CFₜ = cash flow at time t, r = discount rate, C₀ = initial investment
Example
An investment of $10,000 with expected cash flows of $3,000, $4,000, $5,000, $6,000, and $7,000 over 5 years at a 10% discount rate: NPV = -10,000 + 3,000/1.1 + 4,000/1.21 + 5,000/1.331 + 6,000/1.4641 + 7,000/1.61051 = $8,083.17. Since NPV is positive, the investment is expected to generate value above the required 10% return.
Frequently Asked Questions
What does a positive NPV mean?
A positive NPV means the investment is expected to generate more value than its cost, considering the time value of money. It indicates the project should be accepted.
What discount rate should I use?
The discount rate typically represents the cost of capital or the minimum acceptable rate of return. Common choices include the weighted average cost of capital (WACC), the risk-free rate plus a risk premium, or the opportunity cost of alternative investments.
What is the difference between NPV and IRR?
NPV gives you the dollar value of an investment's worth, while IRR (Internal Rate of Return) gives you the percentage return. IRR is the discount rate that makes NPV equal to zero.
Can NPV be negative?
Yes. A negative NPV means the investment's present value of future cash flows is less than the initial cost. This suggests the project will not meet the required rate of return and should generally be rejected.
NPV vs IRR vs Payback Period
NPV, IRR, and payback period are the three most common capital budgeting metrics, each with different strengths. NPV gives the absolute dollar value created by an investment — it is the gold standard recommended by corporate finance textbooks (Brealey, Myers & Allen). IRR gives the percentage return, making it easier to compare projects of different sizes. The payback period tells you how quickly you recover your initial investment but ignores the time value of money and cash flows after payback.
| Metric | Measures | Best For | Limitation |
|---|---|---|---|
| NPV | Dollar value created | Maximizing shareholder wealth | Requires accurate discount rate |
| IRR | Percentage return | Comparing projects of different sizes | Can give multiple values for non-conventional cash flows |
| Payback | Time to recover investment | Liquidity-focused decisions | Ignores time value of money |
How to Choose the Right Discount Rate
The discount rate is the most critical input in NPV analysis. Common approaches include: using the company's Weighted Average Cost of Capital (WACC) for corporate projects, the required rate of return for personal investments, the risk-free rate (10-year Treasury yield) plus a risk premium for uncertain ventures, or the opportunity cost of the next best alternative investment. A higher discount rate makes future cash flows worth less today, reducing NPV.
Real-World NPV Applications
- Real estate: Evaluate rental property purchases by discounting expected rental income minus expenses
- Business expansion: Determine if opening a new location will generate positive returns above the cost of capital
- Equipment purchases: Compare buying vs leasing by calculating NPV of each option's cash flows
- Startup valuation: Venture capitalists use discounted cash flow (DCF) models — essentially NPV — to value companies
- Personal finance: Decide between paying off a mortgage early vs investing the extra payments