Net Present Value (NPV) Calculator
Understanding Net Present Value (NPV)
Net Present Value (NPV) is a fundamental concept in finance used to determine the profitability of an investment or project. It represents the difference between the present value of future cash inflows and the present present value of cash outflows over a period of time. In simpler terms, NPV helps you understand how much an investment is worth today, considering the time value of money.
Why is NPV Important?
The core principle behind NPV is that a dollar today is worth more than a dollar in the future. This is due to several factors, including inflation, opportunity cost (the potential return you could earn on an alternative investment), and risk. The discount rate used in the NPV calculation reflects these factors.
- Positive NPV: If the NPV is positive, it suggests that the projected earnings generated by the investment will be greater than the anticipated costs. This generally indicates that the investment is potentially profitable and should be considered.
- Negative NPV: A negative NPV implies that the costs associated with the investment are expected to outweigh the benefits. In such cases, the investment might not be financially viable and could lead to a net loss.
- Zero NPV: A zero NPV means the present value of the expected cash inflows exactly equals the present value of the expected cash outflows. The investment is expected to break even.
How to Calculate NPV
The formula for NPV is:
NPV = Σ [Cash Flow_t / (1 + r)^t] - Initial Investment
Where:
Cash Flow_t is the cash flow in period tr is the discount rate (as a decimal)t is the time period (year)Initial Investment is the upfront cost of the investment
Our calculator simplifies this process. You provide the initial investment, the annual discount rate, and a comma-separated list of expected cash flows for each period (typically years). The calculator then computes the NPV for you.
Example Calculation
Let's say you are considering an investment with the following details:
- Initial Investment: $50,000
- Discount Rate: 12% per year
- Expected Cash Flows: $15,000 in Year 1, $20,000 in Year 2, $25,000 in Year 3
Using our calculator with these inputs:
- Initial Investment: 50000
- Discount Rate: 12
- Cash Flows: 15000,20000,25000
The calculated NPV would show whether this investment is likely to be profitable in today's dollars.
function calculateNPV() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var discountRate = parseFloat(document.getElementById("discountRate").value) / 100; // Convert percentage to decimal
var cashFlowsInput = document.getElementById("cashFlows").value;
var resultElement = document.getElementById("result");
resultElement.innerHTML = ""; // Clear previous results
// Validate inputs
if (isNaN(initialInvestment) || initialInvestment < 0) {
resultElement.innerHTML = "Please enter a valid positive number for Initial Investment.";
return;
}
if (isNaN(discountRate) || discountRate < 0) {
resultElement.innerHTML = "Please enter a valid positive number for Discount Rate.";
return;
}
if (cashFlowsInput.trim() === "") {
resultElement.innerHTML = "Please enter cash flows for each year.";
return;
}
var cashFlowStrings = cashFlowsInput.split(',');
var cashFlows = [];
for (var i = 0; i < cashFlowStrings.length; i++) {
var cf = parseFloat(cashFlowStrings[i].trim());
if (isNaN(cf)) {
resultElement.innerHTML = "Please ensure all cash flows are valid numbers.";
return;
}
cashFlows.push(cf);
}
var totalPresentValue = 0;
for (var t = 0; t < cashFlows.length; t++) {
totalPresentValue += cashFlows[t] / Math.pow(1 + discountRate, t + 1);
}
var npv = totalPresentValue – initialInvestment;
resultElement.innerHTML = "
Result
";
resultElement.innerHTML += "
Net Present Value (NPV): $" + npv.toFixed(2) + "";
if (npv > 0) {
resultElement.innerHTML += "The investment is potentially profitable (Positive NPV).";
} else if (npv < 0) {
resultElement.innerHTML += "The investment may not be profitable (Negative NPV).";
} else {
resultElement.innerHTML += "The investment is expected to break even (Zero NPV).";
}
}
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