NPV
Net present value
About This Calculator
Net Present Value (NPV) is a core financial metric for evaluating investments and projects. It sums the present value of all future cash flows (discounted at a required rate of return) minus the initial investment. A positive NPV means the investment adds value; negative NPV means it destroys value at the given discount rate.
Formula
NPV = Σ [Cₜ / (1 + r)ᵗ] − Initial Investment
Cₜ = cash flow in period t, r = discount rate, t = period
IRR = rate r at which NPV = 0
Example Calculation
Project costs $10,000; generates $4,000/year for 4 years; discount rate 8%
- PV(yr1) = 4000/1.08 = $3,704
- PV(yr2) = 4000/1.16 = $3,448; PV(yr3) = $3,175; PV(yr4) = $2,940
- NPV = (3704+3448+3175+2940) − 10000 = 13267 − 10000 = $3,267
NPV = +$3,267 → Accept the project
NPV Decision Rule
| NPV | Decision | Meaning |
|---|---|---|
| NPV > 0 | Accept | Project returns more than the required rate |
| NPV = 0 | Indifferent | Project returns exactly the required rate |
| NPV < 0 | Reject | Project returns less than the required rate |
| NPV highest | Prefer | When comparing mutually exclusive projects, choose highest NPV |
Frequently Asked Questions
What discount rate should I use?
Use your required rate of return or cost of capital. Businesses often use their Weighted Average Cost of Capital (WACC). For personal investments, use the return you could get on a similarly risky alternative (opportunity cost).
What is the difference between NPV and IRR?
NPV gives a dollar value of value created. IRR (Internal Rate of Return) gives the percentage return rate at which NPV=0. NPV is generally preferred for investment decisions; IRR can give misleading results with non-standard cash flows.
Why is money worth less in the future?
Discounting reflects the time value of money: a dollar today can be invested to earn a return, making it worth more than a dollar in the future. It also accounts for inflation and uncertainty — future cash flows are less certain than present ones.
What is payback period vs NPV?
Payback period tells how long to recover the initial investment — simple but ignores time value of money and cash flows beyond the payback date. NPV accounts for all cash flows, their timing, and the cost of capital, making it a superior measure of value creation.