What is Net Present Value (NPV) Calculator?
How it Works
Step-by-Step Guide
1. Initial Investment
Enter the startup cost (negative cash flow).
2. Discount Rate
Enter the required rate of return (often WACC).
3. Cash Flows
Input expected net cash flow for each year.
4. Calculate
Sum the discounted values.
Example
Input: Invest $10k, Return $3k/yr for 5 yrs, 5% rate
Result: $2,988 NPV
FAQ
What discount rate should I use?
Companies often use their WACC. Individuals might use their opportunity cost or expected market return.
NPV vs IRR?
NPV gives a dollar value; IRR gives the percentage return. NPV is generally preferred for mutually exclusive projects.
Does NPV account for inflation?
Usually, the discount rate includes an inflation premium. If using real cash flows, use a real discount rate.
What if NPV is zero?
The project is expected to exactly break even in value terms.
Limitations?
It relies heavily on future cash flow estimates, which can be uncertain.
Conclusion
A positive NPV indicates that projected earnings (in present dollars) exceed anticipated costs, suggesting the investment should be profitable. A negative NPV typically results in rejection.