Net Present Value is the gold standard for investment analysis used by professionals worldwide. This calculator helps you determine if an investment will add value to your portfolio or business by accounting for the time value of money.
How This Calculator Works
This calculator evaluates investment profitability:
- Initial Investment: The upfront cost of the project or investment
- Cash Flows: Expected annual returns from the investment
- Discount Rate: Your required rate of return or cost of capital
- NPV Result: The net value created (or destroyed) by the project
The Formula Explained
NPV = Σ [CFt / (1 + r)^t] - Initial Investment
Where:
- CFt = Cash flow at time t
- r = Discount rate (required return)
- t = Time period
- Σ = Sum of all discounted cash flows
Step-by-Step Example
Business Equipment Investment
| Scenario | Initial Cost | Annual Cash Flow (5 years) | Discount Rate | NPV |
| Project A | $100,000 | $30,000 | 10% | $13,724 ✓ |
| Project B | $100,000 | $25,000 | 10% | -$5,230 ✗ |
| Project C | $50,000 | $15,000 | 10% | $6,862 ✓ |
Project A adds $13,724 in value. Project B destroys value—reject it! Project C is smaller but profitable.
Frequently Asked Questions
What is Net Present Value (NPV)?
NPV is the difference between present value of cash inflows and outflows over an investment's lifetime. It tells you whether an investment will create or destroy value. A positive NPV means the investment earns more than your required return; negative means it earns less.
Why is NPV considered the best investment metric?
NPV is preferred because it: (1) accounts for time value of money, (2) considers all cash flows, (3) gives a dollar amount of value created, (4) can compare projects of different sizes, and (5) directly measures shareholder value creation.
How do I choose the right discount rate?
Your discount rate should reflect your cost of capital or required return:
- Corporate projects: Use WACC (weighted average cost of capital), typically 8-12%
- Personal investments: Use your expected alternative return, 7-10%
- High-risk projects: Add a risk premium, 12-15%+
- Very safe investments: Use risk-free rate + small premium, 4-6%
What does a positive NPV mean?
A positive NPV means the investment returns more than your required rate. If your discount rate is 10% and NPV is positive, the true return exceeds 10%. The investment creates value and should generally be accepted.
What does a negative NPV mean?
A negative NPV means the investment returns less than your required rate. Even if it makes money, it doesn't make enough to justify the risk and opportunity cost. Generally, negative NPV projects should be rejected.
How do I compare multiple investments using NPV?
When comparing investments: (1) Calculate NPV for each using the same discount rate, (2) Choose the project with the highest NPV (assuming sufficient capital), (3) Consider NPV per dollar invested if capital is limited (profitability index).
What's the difference between NPV and IRR?
NPV gives a dollar amount of value created. IRR (Internal Rate of Return) gives the percentage return that makes NPV = 0. NPV is generally preferred because IRR can give misleading results with unconventional cash flows or when comparing mutually exclusive projects.
What are NPV's limitations?
NPV limitations: (1) Requires accurate cash flow forecasts, (2) Discount rate selection is subjective, (3) Assumes cash flows can be reinvested at the discount rate, (4) Doesn't capture strategic value or optionality, (5) Larger projects naturally have larger NPV.
Key Points to Remember
- NPV > 0: Accept the investment—it creates value
- NPV < 0: Reject the investment—it destroys value
- NPV = 0: Investment exactly meets your required return (marginal)
- Higher discount rate: Makes NPV smaller (future cash worth less)
- Consistent rates: Always compare projects using the same discount rate