Net Present Value (NPV) Calculator
Cash Flows
Net Present Value
This investment will lose value.
Project Summary
- Initial Outlay:$10,000
- Total Cash Inflow:$15,000
- Discount Rate:10%
Interpretation: A positive NPV indicates that projected earnings (in present dollars) exceed anticipated costs. Generally, an investment with a positive NPV will be a profitable one.
What is Net Present Value (NPV)?
Net Present Value (NPV) is 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.
In simple terms, it answers the question: "Is this project worth more than it costs, considering the time value of money?"
The Time Value of Money
NPV relies on the concept that a dollar today is worth more than a dollar tomorrow. Why? Because you can invest a dollar today and earn interest on it.
If you are promised $1,000 five years from now, it is not worth $1,000 to you today. You have to "discount" it back to today's value using a Discount Rate (often the cost of capital or desired rate of return).
How to Interpret NPV Results
Positive NPV (> 0)
The projected earnings (in present dollars) exceed the anticipated costs. The investment is profitable and should theoretically be undertaken.
Negative NPV (< 0)
The project is expected to result in a net loss. It will subtract value from the company or portfolio and should generally be rejected.
Zero NPV: The project is expected to exactly break even.
The NPV Formula
The math involves summing the Present Values (PV) of each individual cash flow:
- r: Discount rate (decimal)
- t: Time period (years)
Frequently Asked Questions
How do I choose the Discount Rate?
For businesses, this is often the Weighted Average Cost of Capital (WACC)—the average rate a company expects to pay to finance its assets. For individuals, use your desired rate of return or the rate you could earn on an alternative investment with similar risk (like the S&P 500 average of 8-10%).
Is NPV better than ROI?
Yes, for long-term projects. ROI tells you the total percentage return but ignores when the money comes in. NPV accounts for the timing of cash flows, which is critical for accurate valuation.