NPV Calculator
Calculate Net Present Value (NPV) of an investment from its initial cost, discount rate, and projected future cash flows. NPV tells you whether an investment creates or destroys value — a positive NPV means accept, a negative NPV means reject.
Cash Flow Discounting Breakdown
| Year | Cash Flow | Discount Factor | Present Value |
|---|
What Is NPV?
Net Present Value (NPV) measures the value an investment creates after accounting for the time value of money. It discounts all future cash flows back to today's dollars at a required rate of return (the discount rate), then subtracts the initial investment.
The decision rule is simple: if NPV is positive, the investment creates value — accept it. If NPV is negative, it destroys value — reject it. Among multiple investments, the one with the highest NPV creates the most value.
NPV Formula
NPV = −C₀ + CF₁/(1+r)¹ + CF₂/(1+r)² + … + CFₙ/(1+r)ⁿ
- C₀ — initial investment (negative cash flow at time 0)
- CF — cash flow in each future period
- r — discount rate (often WACC or required return)
- n — number of periods
Worked Example
Investment of $100,000, discount rate 10%, cash flows of $25K, $30K, $35K, $40K, $45K over 5 years:
PV of Year 1 = $25,000 ÷ 1.10 = $22,727
PV of Year 2 = $30,000 ÷ 1.10² = $24,793
PV of Year 3 = $35,000 ÷ 1.10³ = $26,296
PV of Year 4 = $40,000 ÷ 1.10⁴ = $27,321
PV of Year 5 = $45,000 ÷ 1.10⁵ = $27,941
Total PV of inflows = $129,078
NPV = $129,078 − $100,000 = $29,078 — accept the project.
How to Interpret NPV
- NPV > 0 (Accept) — the investment creates value. The higher the NPV, the more value created.
- NPV = 0 (Indifferent) — the investment exactly earns the required return. Acceptable but not value-creating.
- NPV < 0 (Reject) — the investment destroys value. Do not proceed unless there are non-financial reasons.
- Comparing investments — among mutually exclusive options, choose the one with the highest positive NPV.
Frequently Asked Questions
What is a good NPV?
Any positive NPV is technically "good" — it means the investment creates value. Higher is better. A useful rule of thumb is that the NPV should be at least 10–20% of the initial investment for the project to be worth the effort, given the uncertainty in cash flow forecasts. If NPV is barely positive, small forecast errors could wipe it out.
What discount rate should I use for NPV?
The discount rate should reflect the risk of the cash flows. For a company evaluating a project, use the company's WACC (weighted average cost of capital). For a personal investment, use the return you could earn on a similar-risk alternative. Higher-risk projects require a higher discount rate, which lowers NPV.
What is the difference between NPV and IRR?
NPV gives an answer in dollars — how much value the investment creates. IRR gives an answer in percentage — the annual return the investment achieves. Both use the same cash flows, but NPV is generally preferred because it directly answers the "how much value" question, works when discount rates change over time, and does not suffer from multiple-IRR problems.
What is a profitability index?
The profitability index (PI) is PV of inflows divided by initial investment. A PI above 1.0 means the project has positive NPV. PI is useful when comparing projects of different sizes — a small project with PI of 1.5 may create more value per dollar invested than a large project with PI of 1.2, even if the large project has higher absolute NPV.
Can NPV be negative?
Yes. A negative NPV means the investment's future cash flows, discounted at the required rate, are worth less than the initial cost. The investment destroys value — do not proceed. This happens when the discount rate is too high, cash flow projections are too optimistic, or the initial cost is too large.
Why does NPV decrease as the discount rate increases?
Because higher discount rates shrink the present value of future cash flows. A dollar received in 5 years is worth less today if you could earn 15% on your money than if you could only earn 5%. This is why projects that look attractive at low discount rates can become negative-NPV at higher rates — and why sensitivity analysis (testing NPV at multiple discount rates) is a standard part of investment analysis.