function calculateUndiscountedNPV() {
// Get inputs
var investmentInput = document.getElementById('initialInvestment').value;
var cf1Input = document.getElementById('cashFlow1').value;
var cf2Input = document.getElementById('cashFlow2').value;
var cf3Input = document.getElementById('cashFlow3').value;
var cf4Input = document.getElementById('cashFlow4').value;
var cf5Input = document.getElementById('cashFlow5').value;
// Parse floats, default to 0 if empty or NaN
var investment = parseFloat(investmentInput) || 0;
var cf1 = parseFloat(cf1Input) || 0;
var cf2 = parseFloat(cf2Input) || 0;
var cf3 = parseFloat(cf3Input) || 0;
var cf4 = parseFloat(cf4Input) || 0;
var cf5 = parseFloat(cf5Input) || 0;
// Calculate Totals
var totalInflows = cf1 + cf2 + cf3 + cf4 + cf5;
var netValue = totalInflows – investment;
// Calculate ROI
var roi = 0;
if (investment > 0) {
roi = (netValue / investment) * 100;
} else if (investment === 0 && totalInflows > 0) {
roi = Infinity; // Edge case
}
// Formatting function
function formatMoney(num) {
return '$' + num.toLocaleString('en-US', {minimumFractionDigits: 2, maximumFractionDigits: 2});
}
// Update UI
document.getElementById('totalInflowDisplay').innerText = formatMoney(totalInflows);
document.getElementById('totalCostDisplay').innerText = formatMoney(investment);
var netValueEl = document.getElementById('netValueDisplay');
netValueEl.innerText = formatMoney(netValue);
// Color coding for positive/negative result
if (netValue < 0) {
netValueEl.style.color = "#c0392b";
} else {
netValueEl.style.color = "#27ae60";
}
document.getElementById('roiDisplay').innerText = roi.toFixed(2) + "%";
// Show results
document.getElementById('resultsArea').style.display = "block";
}
How to Calculate NPV Without a Discount Rate
Net Present Value (NPV) is a core component of corporate finance and investment analysis. Typically, the calculation involves discounting future cash flows back to the present day using a specific "discount rate" (often the Weighted Average Cost of Capital or WACC). However, there are scenarios where you may not have a discount rate, or you simply wish to calculate the raw potential of an investment.
When you calculate NPV without a discount rate, you are effectively calculating the Net Cash Flow or the Undiscounted NPV. This metric tells you the absolute accounting profit of a project without adjusting for the time value of money.
Key Concept: Calculating NPV without a discount rate assumes a discount rate of 0%. This treats a dollar received 5 years from now as having the exact same value as a dollar received today.
The Formula: NPV Without Discount Rate
Removing the discount rate simplifies the complex NPV formula significantly. Instead of dividing annual cash flows by (1 + r)^n, you simply sum all future cash inflows and subtract the initial investment.
Formula:
Undiscounted NPV = (Sum of All Future Cash Flows) – Initial Investment
Where:
Sum of Cash Flows: The total money the project generates over its life.
Initial Investment: The upfront capital required to start the project.
Step-by-Step Calculation Example
Let's imagine you are evaluating a small business upgrade. You do not want to speculate on interest rates or inflation, so you decide to calculate the value without a discount rate.
Scenario:
Initial Investment: $10,000 for new machinery.
Year 1 Return: $3,000
Year 2 Return: $4,000
Year 3 Return: $5,000
Calculation:
Sum the Inflows: $3,000 + $4,000 + $5,000 = $12,000
In this "Undiscounted NPV" scenario, the project generates a net value of $2,000.
When Should You Use This Method?
While standard financial theory discourages ignoring the discount rate, there are practical applications for this simplified method:
1. Short-Term Projects
If a project lasts only a few months, the impact of inflation or lost interest is negligible. In such cases, a simple Net Cash Flow calculation provides a sufficient accuracy level for decision-making.
2. Zero-Interest Environments
In economic environments where interest rates are near zero, the "opportunity cost" of capital is minimal. Consequently, the Undiscounted NPV becomes very close to the true NPV.
3. Preliminary Screening
Investors often use the undiscounted method as a "sanity check." If a project does not yield a profit even before applying a discount rate, it will certainly fail once the discount rate is applied. If the Undiscounted NPV is negative, the project should be rejected immediately.
Limitations to Consider
It is crucial to understand that calculating without a discount rate has blind spots:
Ignores Inflation: It treats future money as equal to current money, even though purchasing power usually decreases over time.
Ignores Opportunity Cost: It assumes that if you didn't invest in this project, the money would sit idle earning 0%, rather than earning interest in a savings account or stock market index.
Overestimates Value: Generally, this method will make long-term projects look more attractive than they actually are compared to short-term projects.