Enter investment details and cash flows above
Results appear as you typeWhat Is Net Present Value (NPV)?
Net Present Value (NPV) is the difference between the present value of all future cash inflows and the present value of all cash outflows over a period of time. It is the single most important metric in capital budgeting and investment analysis โ used by businesses, investors, and financial analysts worldwide to decide whether a project or investment is worth pursuing.
The core idea behind NPV is the time value of money โ a dollar today is worth more than a dollar in the future, because today’s dollar can be invested to earn returns. NPV accounts for this by discounting future cash flows back to their value in today’s dollars.
If NPV > 0 โ the investment creates value and should be accepted. If NPV < 0 โ the investment destroys value and should be rejected. If NPV = 0 โ the investment exactly meets your required rate of return.
NPV Formula
Each future cash flow is divided by (1 + r)แต to bring it back to today’s value. A higher discount rate means future cash flows are worth less today โ making investments with distant payoffs less attractive.
How to Use This Calculator
- 1Enter the initial investment โ the upfront cost at Year 0 (enter as positive; the calculator treats it as an outflow automatically).
- 2Enter the discount rate โ typically your company’s WACC (Weighted Average Cost of Capital) or your required rate of return (e.g. 10%).
- 3Enter cash flows for each year โ positive values are inflows (revenue, savings), negative values are additional outflows (costs, maintenance). Click “Add Year” to add more periods.
- 4Results appear instantly โ see NPV, IRR approximation, total cash flows, and a timeline visualization. Click to expand the present value table for each period.
- 5Interpret the verdict โ green NPV means accept the investment, red means reject it at your required rate of return.
Worked Example
A company considers buying a machine for $100,000. It will generate cash flows of $30,000/year for 5 years. The required rate of return is 10%.
NPV vs IRR โ What’s the Difference?
Shows the absolute dollar value created or destroyed. Better for comparing projects of different sizes. Decision: Accept if NPV > 0.
The discount rate that makes NPV = 0. Shows the percentage return of the investment. Decision: Accept if IRR > required rate.
How many years to recover the initial investment. Simple but ignores time value of money and cash flows beyond payback.
NPV รท Initial Investment. Useful when comparing projects with limited capital. PI > 1 means accept.
Frequently Asked Questions
The most common choice is the Weighted Average Cost of Capital (WACC) โ a blend of your debt and equity financing costs weighted by their proportions. For personal investments, use your required rate of return or the opportunity cost of capital (what you could earn in an alternative investment of similar risk). For a simple benchmark, many analysts use 10% as a standard hurdle rate for moderate-risk projects.
Purely from a financial standpoint, a negative NPV means the investment does not meet your required rate of return and is destroying value. However, some investments with negative NPVs are still pursued for strategic reasons โ regulatory compliance, brand building, employee morale, or long-term market positioning that does not show up in quantifiable cash flows. NPV is a powerful tool but should be one input among many in investment decisions.
ROI (Return on Investment) = (Net Profit รท Cost) ร 100. It is simple but does not account for the time value of money or the timing of cash flows. NPV is more sophisticated โ it discounts all future cash flows to present value, making it a more accurate measure of true value creation. For long-term investments or projects spanning multiple years, NPV is almost always more reliable than ROI.
A higher discount rate means you demand a higher return for the risk of waiting. This makes future cash flows worth less in today’s dollars. For example, $1,000 received in 5 years is worth $621 today at 10% discount rate, but only $402 today at 20% discount rate. Since NPV sums all discounted future cash flows and subtracts the initial investment, a higher rate reduces the value of those future inflows โ lowering NPV.
The Internal Rate of Return (IRR) is the specific discount rate at which NPV equals exactly zero. It represents the annualized percentage return of the investment. If IRR exceeds your required rate of return (WACC or hurdle rate), the project is profitable. The relationship: when discount rate < IRR, NPV is positive. When discount rate > IRR, NPV is negative. They are two ways to evaluate the same investment โ NPV in dollars, IRR in percentage.
Terminal value represents the value of all cash flows beyond your explicit forecast period. The most common approach is the Gordon Growth Model: Terminal Value = Final Year CF ร (1 + g) รท (r โ g), where g is the expected long-term growth rate and r is the discount rate. Add this terminal value to your final year’s cash flow in the calculator. Terminal value often represents 60โ80% of total NPV in long-lived projects.