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NPV Calculator
NPV Calculator
Evaluate the profitability of an investment over time
$0
Net Present Value (NPV)
Total Cash Flows
$0
Decision
Accept
Discounted Cash Flow Analysis
About the NPV Calculator
Net Present Value (NPV) tells you whether an investment or project is worth doing by comparing the value of future cash flows today with the money you put in.
How to use the NPV Calculator
- Enter the Discount Rate (%), the return you require or your cost of capital.
- Enter the Initial Investment ($).
- Enter the Cash Flows per Year separated by commas, for example 10000, 15000, 20000.
- Press Calculate Net Present Value.
Formula and method
NPV = Ξ£ CFβ Γ· (1 + r)α΅ β Initial Investment
CFβ is the cash flow in year t and r is the discount rate.
Worked example
Invest $10,000 and receive $4,000, $5,000 and $6,000 over three years at a 10% discount rate: 3,636 + 4,132 + 4,508 = 12,277. NPV = $2,277, which is positive, so the project adds value.
When to use the NPV Calculator
- Deciding whether a project or an investment is worth its cost.
- Comparing two projects with cash flows at different times.
- Valuing a business opportunity with a required rate of return.
Common mistakes to avoid
- Choosing a discount rate that is too low. It makes almost every project look good.
- Forgetting the initial cost, which should be entered as a negative cash flow at time zero.
- Using optimistic cash flow forecasts without testing lower scenarios.
Tips
- A positive NPV means the investment earns more than the discount rate.
- Results are sensitive to the discount rate, so test more than one.
Frequently Asked Questions
The present value of the returns is lower than the cost, so the project is expected to earn less than your required return.
Use your cost of capital or the return you could earn on a comparable-risk alternative.
The project is expected to earn more than your required return, so it adds value.
The return you require, or the cost of capital. Future money is worth less today, and the discount rate measures by how much.