NPV Calculator (Net Present Value)

How to Calculate NPV

Net Present Value (NPV) is a financial metric used to measure the value of an investment by calculating the difference between the present value of future cash inflows and the initial investment.

In simple terms:

• NPV > 0 → The project creates value
• NPV = 0 → The project breaks even
• NPV < 0 → The project destroys value

NPV is widely used in:

• Capital budgeting
• Investment analysis
• Corporate finance
• Project evaluation

NPV Formula Explained

The Net Present Value formula is:

NPV = Σ [ Ct / (1 + r)^t ]

Where:

• ( C_t ) = cash flow at period *t*
• ( r ) = discount rate
• ( t ) = time period
• ( n ) = total number of periods

The formula discounts future cash flows back to today's value, reflecting the time value of money.

When Should You Use NPV?

Use NPV when:

• Comparing projects of different sizes
• Evaluating long-term investments
• Making capital budgeting decisions
• Assessing whether a project meets required return thresholds

NPV is especially useful when cash flows are uneven or when capital constraints exist.

NPV Calculation Example

Example:

Initial Investment (Year 0): -100,000
Year 1 Cash Flow: 30,000
Year 2 Cash Flow: 40,000
Year 3 Cash Flow: 50,000
Discount Rate: 10%

Result:

NPV = +6,579.48

Since the NPV is positive, this investment is expected to create value.

NPV vs IRR – What's the Difference?

👉 Tip: NPV is generally considered more reliable than IRR when comparing mutually exclusive projects.

You may also want to try our 👉 IRR Calculator (Internal Rate of Return)

Understanding NPV (Net Present Value)

Net Present Value (NPV) is a financial metric used to measure the value of an investment by calculating the difference between the present value of future cash inflows and the initial investment.

In simple terms:

• NPV > 0 → The project creates value
• NPV = 0 → The project breaks even
• NPV < 0 → The project destroys value

NPV is widely used in:

• Capital budgeting
• Investment analysis
• Corporate finance
• Project evaluation

Advantages and Limitations of NPV

Advantages

• Accounts for time value of money
• Directly measures value creation
• Works well for complex cash flows

Limitations

• Requires an accurate discount rate
• Less intuitive than percentage-based metrics like IRR

Frequently Asked Questions (FAQ)

What does a negative NPV mean?

A negative NPV means the investment is expected to generate less value than the required return, making it financially unattractive.

Is a higher NPV always better?

Generally yes. A higher NPV indicates greater value creation, assuming similar risk levels.

What discount rate should I use?

Common choices include:

• Cost of capital
• Required rate of return
• Opportunity cost

Is NPV better than IRR?

NPV is often preferred in professional finance because it measures absolute value rather than relative returns.