Net Present Value (NPV) Calculator
Understanding Net Present Value (NPV)
Net Present Value (NPV) is a fundamental concept in finance used to evaluate the profitability of an investment or project. It represents the difference between the present value of future cash inflows and the present value of cash outflows over a period of time. In simpler terms, NPV tells you whether a potential investment is likely to be worth more than it costs, considering the time value of money.
The core principle behind NPV is that a dollar today is worth more than a dollar in the future. This is due to factors like inflation, opportunity cost (the return you could earn on alternative investments), and risk. The discount rate used in the NPV calculation reflects these factors. A higher discount rate implies a greater preference for current money and a higher perceived risk.
How NPV is Calculated
The formula for NPV is as follows:
$$ NPV = \sum_{t=0}^{n} \frac{C_t}{(1 + r)^t} $$
Where:
- \( C_t \) = Net cash flow during period \( t \)
- \( r \) = Discount rate (per period)
- \( t \) = Time period (e.g., year 0, year 1, year 2, etc.)
- \( n \) = Total number of periods
The cash flow at \( t=0 \) is typically the initial investment, which is usually a negative value.
Interpreting the NPV Result
- Positive NPV (> 0): The investment is expected to generate more value than it costs. It is generally considered a good investment and should be accepted.
- Zero NPV (= 0): The investment is expected to generate exactly enough value to cover its costs. The decision to accept or reject may depend on other factors.
- Negative NPV (< 0): The investment is expected to generate less value than it costs. It is generally considered a poor investment and should be rejected.
Example Calculation
Let's consider an investment with the following details:
- Initial Investment: $10,000
- Discount Rate: 10% per year
- Projected Cash Flows: $3,000 in Year 1, $3,000 in Year 2, $3,000 in Year 3, and $3,000 in Year 4.
Using the NPV calculator with these inputs:
- Initial Investment: 10000
- Discount Rate: 10
- Cash Flows: 3000, 3000, 3000, 3000
The calculated NPV would indicate whether this investment is financially viable.
function calculateNPV() {
var initialInvestment = parseFloat(document.getElementById("initialInvestment").value);
var discountRate = parseFloat(document.getElementById("discountRate").value) / 100;
var cashFlowsInput = document.getElementById("cashFlows").value;
var resultDiv = document.getElementById("result");
resultDiv.innerHTML = ""; // Clear previous results
if (isNaN(initialInvestment) || isNaN(discountRate)) {
resultDiv.innerHTML = "Please enter valid numbers for Initial Investment and Discount Rate.";
return;
}
var cashFlows = [];
if (cashFlowsInput) {
cashFlows = cashFlowsInput.split(',').map(function(flow) {
return parseFloat(flow.trim());
});
}
var invalidCashFlow = false;
for (var i = 0; i < cashFlows.length; i++) {
if (isNaN(cashFlows[i])) {
invalidCashFlow = true;
break;
}
}
if (invalidCashFlow) {
resultDiv.innerHTML = "Please enter valid numbers for all cash flows, separated by commas.";
return;
}
var npv = -initialInvestment; // Start with the initial investment as a negative cash flow at t=0
for (var t = 0; t 0) {
interpretation = "This investment is expected to be profitable.";
} else if (npv < 0) {
interpretation = "This investment is expected to result in a loss.";
} else {
interpretation = "This investment is expected to break even.";
}
resultDiv.innerHTML =
"
Net Present Value (NPV): $" + npv.toFixed(2) + "" +
"" + interpretation + "";
}
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