The Net Present Value (NPV) is a fundamental concept in finance used to determine the profitability of an investment or project. It calculates the difference between the present value of future cash inflows and the present value of cash outflows over a period of time. Essentially, it tells you how much value an investment is expected to add to a company in today's dollars.
A positive NPV indicates that the projected earnings generated by an investment will be more than the anticipated costs. If the NPV is zero, the investment is expected to generate exactly enough to cover its costs. A negative NPV suggests that the investment is expected to result in a net loss.
The NPV Formula
The formula for calculating NPV is as follows:
NPV = Σ [ CFt / (1 + r)^t ] - Initial Investment
Where:
CFt = Net cash flow during period t
r = Discount rate (the required rate of return or cost of capital)
t = The time period (year) of the cash flow
Σ = Summation over all periods
Initial Investment = The initial cost of the investment (usually a negative cash flow at time t=0)
How to Use This Calculator
Discount Rate (%): Enter the annual rate of return you require for the investment, or the cost of capital for your company. This rate accounts for the time value of money and risk.
Initial Investment (Cost): Enter the total upfront cost of the investment. This is typically a negative cash flow at the beginning (Year 0).
Projected Cash Flows: For each future year of the investment's life, enter the expected net cash flow (inflows minus outflows) for that year. Click "Add Another Year" to include more periods.
Calculate NPV: Click the button to see the Net Present Value.
Interpreting the Results
Positive NPV: The investment is expected to be profitable and should be considered.
Negative NPV: The investment is expected to result in a loss and should likely be rejected.
Zero NPV: The investment is expected to break even.
NPV analysis is a powerful tool for capital budgeting and investment decision-making, helping to ensure that resources are allocated to projects that are most likely to create shareholder value.
var cashFlowCounter = 3; // Starts after the initial 3 inputs
function addCashFlowInput() {
var container = document.getElementById('cashFlowsContainer');
var newRow = document.createElement('div');
newRow.className = 'cash-flow-input-row';
var label = document.createElement('label');
label.textContent = 'Cash Flow Year ' + (cashFlowCounter + 1);
label.setAttribute('for', 'cashFlow' + cashFlowCounter);
var input = document.createElement('input');
input.type = 'number';
input.id = 'cashFlow' + cashFlowCounter;
input.placeholder = 'e.g., ' + (30000 + (cashFlowCounter – 2) * 5000); // Example progression
input.step = '0.01';
newRow.appendChild(label);
newRow.appendChild(input);
container.appendChild(newRow);
cashFlowCounter++;
}
function calculateNPV() {
var discountRatePercent = parseFloat(document.getElementById('discountRate').value);
var initialInvestment = parseFloat(document.getElementById('initialInvestment').value);
var resultValueElement = document.getElementById('result-value');
if (isNaN(discountRatePercent) || isNaN(initialInvestment)) {
resultValueElement.textContent = "Invalid Input";
resultValueElement.style.color = "#dc3545";
return;
}
var discountRate = discountRatePercent / 100;
var totalPresentValue = 0;
for (var i = 0; i 0) {
resultValueElement.style.color = "#28a745"; // Success Green
} else if (npv < 0) {
resultValueElement.style.color = "#dc3545"; // Red for negative
} else {
resultValueElement.style.color = "#004a99"; // Primary Blue for zero
}
}