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Net Present Value (NPV) Calculator

Cash Flows

What is Net Present Value (NPV)?

Net Present Value (NPV) is a financial metric used to evaluate 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, NPV tells you how much value an investment is expected to add to a business in today's dollars.

How to Use the NPV Calculator:

  1. Initial Investment: Enter the total cost you anticipate for the investment or project at the beginning. This is typically a negative cash flow.
  2. Discount Rate (Annual %): This represents the required rate of return or the cost of capital for the investment. It accounts for the time value of money and the risk associated with the investment. A higher discount rate indicates a higher required return.
  3. Cash Flows: For each future year of the investment, enter the expected net cash flow (inflows minus outflows) you anticipate receiving or paying. Add more fields if your project extends beyond the initial three years.
  4. Calculate NPV: Click the "Calculate NPV" button to see the result.

Interpreting the NPV Result:

  • NPV > 0 (Positive): The projected earnings generated by the investment are expected to be more than the anticipated costs. This indicates that the investment is likely to be profitable and should be considered.
  • NPV < 0 (Negative): The projected earnings are expected to be less than the anticipated costs. This suggests that the investment may not be profitable and could result in a loss.
  • NPV = 0 (Zero): The projected earnings are exactly equal to the anticipated costs. The investment is expected to neither generate nor lose value.

NPV is a crucial tool for capital budgeting and investment decision-making, helping businesses choose projects that are most likely to enhance shareholder wealth.

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