Net Present Value and Internal Rate of Return Calculator

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NPV and IRR Calculator

Annual Cash Inflows

Net Present Value (NPV)

Internal Rate of Return (IRR)

function calculateInvestmentMetrics() { var initial = parseFloat(document.getElementById('initialInvestment').value); var ratePercent = parseFloat(document.getElementById('discountRate').value); var r = ratePercent / 100; var cfs = []; cfs.push(parseFloat(document.getElementById('year1').value) || 0); cfs.push(parseFloat(document.getElementById('year2').value) || 0); cfs.push(parseFloat(document.getElementById('year3').value) || 0); cfs.push(parseFloat(document.getElementById('year4').value) || 0); cfs.push(parseFloat(document.getElementById('year5').value) || 0); if (isNaN(initial) || isNaN(ratePercent)) { alert("Please enter both the Initial Investment and the Discount Rate."); return; } // NPV Calculation var npv = -initial; for (var i = 0; i < cfs.length; i++) { npv += cfs[i] / Math.pow(1 + r, i + 1); } // IRR Calculation using Secant Method function getNPVAtRate(testRate) { var total = -initial; for (var j = 0; j < cfs.length; j++) { total += cfs[j] / Math.pow(1 + testRate, j + 1); } return total; } var irr = 0; var x0 = 0.1; var x1 = 0.2; var iterations = 0; var maxIterations = 100; var precision = 0.00001; while (iterations < maxIterations) { var f0 = getNPVAtRate(x0); var f1 = getNPVAtRate(x1); if (Math.abs(f1 – f0) < 0.000001) break; var x2 = x1 – f1 * (x1 – x0) / (f1 – f0); if (Math.abs(x2 – x1) 0) { decision = "Decision: The investment is viable as the NPV is positive and IRR exceeds the discount rate."; } else if (npv < 0) { decision = "Decision: The investment may not be viable as the NPV is negative."; } else { decision = "Decision: The investment is at break-even point."; } document.getElementById('decisionText').innerText = decision; }

Understanding NPV and IRR in Capital Budgeting

In the world of corporate finance and investment appraisal, Net Present Value (NPV) and Internal Rate of Return (IRR) are the two most powerful tools for determining whether a project or investment is worth pursuing. While they both look at discounted cash flows, they offer different perspectives on value and profitability.

What is Net Present Value (NPV)?

NPV measures the difference between the present value of cash inflows and the present value of cash outflows over a specific period. By accounting for the "time value of money," NPV tells you exactly how much value an investment will add to a business in today's terms. If the NPV is positive, the project is generally considered a good investment because it generates more than its cost of capital.

What is Internal Rate of Return (IRR)?

IRR is the annualized effective compounded return rate that makes the net present value of all cash flows (both positive and negative) from a particular investment equal to zero. In simpler terms, it is the expected growth rate that a project will generate. Investors typically compare the IRR to their "Hurdle Rate" or cost of capital; if the IRR is higher, the project is greenlit.

Calculation Example

Imagine you are considering a new manufacturing machine with the following profile:

  • Initial Investment: 100,000
  • Discount Rate: 8%
  • Year 1 Cash Flow: 30,000
  • Year 2 Cash Flow: 35,000
  • Year 3 Cash Flow: 40,000
  • Year 4 Cash Flow: 45,000

Using the calculator above, you would find that the NPV is significantly positive, indicating that the machine pays for itself and contributes additional wealth to the company beyond the 8% required return. The IRR would represent the actual percentage return that this specific sequence of cash flows produces.

Key Differences

Feature NPV IRR
Outcome Unit Currency/Absolute Value Percentage Rate
Decision Rule Accept if > 0 Accept if > Cost of Capital
Reinvestment Assumption Reinvested at Discount Rate Reinvested at the IRR itself

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