NPV Calculator

What Is Net Present Value?

Net Present Value (NPV) calculates the present value of all future cash flows from an investment, minus the initial cost. It answers a fundamental question: “Is this investment worth more than it costs?”

A positive NPV means the investment is expected to create value — the present value of future returns exceeds the upfront cost. A negative NPV means the project is expected to destroy value at the given discount rate. NPV is widely considered the gold standard for capital budgeting decisions.

How the NPV Formula Works

The NPV formula discounts each future cash flow back to its present value using the discount rate, then subtracts the initial investment:

NPV = −C₀ + CF₁/(1+r)¹ + CF₂/(1+r)² + … + CF_n/(1+r)ⁿ

Each cash flow is divided by (1 + r)^t to account for the time value of money — a dollar today is worth more than a dollar in the future because it can be invested to earn a return. The higher the discount rate, the less future cash flows are worth today.

Understanding the NPV Profile Chart

The chart plots NPV on the y-axis against discount rate on the x-axis. For a typical investment (initial outflow followed by positive inflows), the NPV curve slopes downward: higher discount rates reduce the present value of future cash flows.

The point where the curve crosses zero is the Internal Rate of Return (IRR) — the discount rate at which the project breaks even. Discount rates below the IRR produce a positive NPV (project creates value); rates above the IRR produce a negative NPV (project destroys value).

NPV Decision Rule

• NPV > 0: Accept the project — it creates value at the required return
• NPV < 0: Reject the project — it destroys value
• NPV = 0: Indifferent — the project earns exactly the required return

The IRR rule generally agrees: accept if IRR > discount rate. However, NPV is preferred for comparing mutually exclusive projects because it accounts for project size differences.

Limitations of NPV

• Discount rate sensitivity: NPV is highly sensitive to the chosen discount rate. A small change can flip the decision from accept to reject.
• Cash flow estimation: NPV is only as good as the cash flow projections. Uncertain or volatile cash flows reduce reliability.
• Reinvestment assumption: NPV assumes intermediate cash flows can be reinvested at the discount rate, which may not be realistic.
• Project size: NPV doesn’t automatically adjust for project size. A $1M project with NPV of $100K may be preferred over a $10M project with NPV of $150K on a capital efficiency basis (use PI for this).