Net Present Value (NPV) Calculator
Calculate the Net Present Value of an investment.
Determine if a project creates value by discounting future cash flows to today's dollars.
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 set time period. It is the most widely used method for evaluating whether a capital investment creates or destroys shareholder value.
The NPV Formula
NPV = -Initial Investment + CF₁/(1+r) + CF₂/(1+r)² + CF₃/(1+r)³ + CF₄/(1+r)⁴ + CF₅/(1+r)⁵
Where:
- CF₁ to CF₅ = Cash flows in years 1 through 5
- r = Discount rate (cost of capital, in decimal form)
- Initial Investment = Upfront cost (treated as a negative cash flow at time zero)
The Time Value of Money
A dollar today is worth more than a dollar in the future. This is because money available now can be invested to earn returns. The discount rate reflects this opportunity cost — if you could earn 10% elsewhere, a project must beat that benchmark to be worthwhile.
Decision Rule
- NPV > 0 → Accept. The project returns more than its cost of capital and creates value.
- NPV < 0 → Reject. The project destroys value; you would be better off investing elsewhere.
- NPV = 0 → Breakeven. The project earns exactly the required return.
Profitability Index
The Profitability Index (PI) scales NPV relative to investment size:
PI = (NPV + Initial Investment) / Initial Investment
A PI > 1 means the project is profitable. This is useful for ranking projects when capital is limited.
Worked Example
You invest $100,000 today and receive $30,000, $35,000, $40,000, $25,000, and $20,000 over five years. At a 10% discount rate:
- PV Year 1: $27,273
- PV Year 2: $28,926
- PV Year 3: $30,053
- PV Year 4: $17,075
- PV Year 5: $12,418
- NPV = $15,745 → Accept the project.
NPV vs. IRR
NPV directly measures dollar value added. IRR measures the percentage return. When they conflict (as with mutually exclusive projects), NPV is the correct decision tool.