How to use the NPV Calculator (Net Present Value)
- Enter the initial investment.
- Enter the cash inflow expected in each of the next five years.
- Enter your discount rate, the return you require.
- Read the NPV, the present value of inflows and the profitability index.
Formula used
NPV = −Investment + Σ CFₜ ÷ (1 + r)ᵗ for years t = 1 to 5. Profitability index = present value of inflows ÷ investment.
Worked example
Here is the NPV Calculator (Net Present Value) worked through with the example values shown above, so you can check each step by hand.
| Inputs | |
|---|---|
| Initial investment | $10,000 |
| Cash inflow, year 1 | $3,000 |
| Cash inflow, year 2 | $3,500 |
| Cash inflow, year 3 | $4,000 |
| Cash inflow, year 4 | $4,000 |
| Cash inflow, year 5 | $4,000 |
| Discount rate (per year) | 8 % |
| Result | |
| Net present value | $4,616.24 |
| Present value of inflows | $14,616.24 |
| Profitability index | 1.4616245 |
| Verdict | Positive NPV: returns more than the discount rate |
NPV at different discount rates
For the default investment and cash flows.
| Discount rate (per year) | Net present value |
|---|---|
| 4 % | $6,383.47 |
| 6 % | $5,461.06 |
| 8 % | $4,616.24 |
| 10 % | $3,840.83 |
| 12 % | $3,127.65 |
| 15 % | $2,160.98 |
The calculation
NPV = −investment + Σ cash flow ÷ (1 + rate)^year. With a $10,000 investment, inflows of $3,000, $3,500, $4,000, $4,000 and $4,000, and an 8% rate, the inflows are worth $14,616.24 in today’s money, so NPV = $4,616.24.
The profitability index is the present value of inflows divided by the cost, 1.46 here. A value above 1 goes with a positive NPV.
The discount rate matters
NPV falls as the rate rises. At 4% the NPV is $6,383.47, at 8% it is $4,616.24, at 15% it is $2,160.98 and at 25% it turns negative at $-362.88. The rate at which NPV hits zero is the IRR, which the IRR calculator finds.
Choose a rate that reflects the project’s risk and your alternatives: your cost of capital for a business, or the return on a comparable investment for a personal decision.
Using NPV to decide
Accept projects with a positive NPV and reject those with a negative NPV, if you are choosing independently. When projects compete for limited money, rank them by NPV or by profitability index, and take care with projects of very different lengths.
The calculation is only as good as its cash flow forecast. Use after-tax cash flows, include the running costs, and test pessimistic and optimistic cases.
Limits
This calculator assumes one investment at the start and inflows at the end of each of five years. Real projects can have costs in later years, which you can handle by entering net cash flow (inflow minus outflow) for each year.
The inflow boxes accept zero or positive numbers, so a year with a net outflow cannot be modelled here. For a longer or irregular series, use a spreadsheet function such as NPV or XNPV.
Frequently asked questions
What does a positive NPV mean?
The investment is expected to return more than the discount rate, so it adds value.
What is a good discount rate?
The return you require given the risk, such as a company’s cost of capital or a comparable investment’s return.
What is the profitability index?
The present value of the inflows divided by the initial investment. Above 1 means a positive NPV.
How is NPV different from IRR?
NPV gives a money amount at your chosen rate. IRR gives the rate at which NPV is zero.
Are cash flows at the end of each year?
Yes. Each inflow is discounted as if received at year end.
Can I use it for a personal decision?
Yes, for example comparing the cost of equipment against the savings it brings over five years.
This calculator gives estimates for information only. Actual figures from a bank, employer, tax authority or doctor may differ. It is not financial, tax, legal or medical advice.