Net Present Value Calculator

Net Present Value (NPV) Calculator

Annual Cash Inflows ($)

Understanding Net Present Value (NPV)

Net Present Value (NPV) is a core financial metric used in capital budgeting to analyze the profitability of a projected investment or project. It represents the difference between the present value of cash inflows and the present value of cash outflows over a specific period of time.

The NPV Formula

NPV = Σ [Rt / (1 + i)^t] – Initial Investment

• Rt: Net cash inflow-outflow during a single period t
• i: Discount rate or return that could be earned in alternative investments
• t: Number of time periods

How to Interpret Results

Calculating NPV helps investors decide whether a project is worth the initial expenditure:

• Positive NPV: The projected earnings (in today's dollars) exceed the anticipated costs. Generally, projects with a positive NPV are considered profitable investments.
• Negative NPV: The project is expected to result in a net loss when considering the time value of money. These projects are typically rejected.
• Zero NPV: The project is expected to break even. It neither adds nor subtracts value.

Practical Example

Suppose you are looking to purchase a piece of equipment for $10,000 (Initial Investment). You expect this equipment to generate $3,000 per year for the next 4 years. Your required rate of return (Discount Rate) is 8%.

By discounting each of those $3,000 payments back to today's value, you would find the total Present Value of the inflows. Subtracting the $10,000 cost would give you the NPV. If the result is above $0, the equipment is likely a sound purchase.

function calculateNPV() { var initialInvestment = parseFloat(document.getElementById('initialInvestment').value); var discountRate = parseFloat(document.getElementById('discountRate').value) / 100; var flows = []; flows.push(parseFloat(document.getElementById('cf1').value) || 0); flows.push(parseFloat(document.getElementById('cf2').value) || 0); flows.push(parseFloat(document.getElementById('cf3').value) || 0); flows.push(parseFloat(document.getElementById('cf4').value) || 0); flows.push(parseFloat(document.getElementById('cf5').value) || 0); if (isNaN(initialInvestment) || isNaN(discountRate)) { alert("Please enter valid numbers for Initial Investment and Discount Rate."); return; } var presentValueInflows = 0; for (var t = 0; t 0) { resultWrapper.style.backgroundColor = "#e8f6ed"; npvValueDisplay.style.color = "#27ae60"; npvStatusDisplay.innerHTML = "This project appears to be a profitable investment."; } else if (npv < 0) { resultWrapper.style.backgroundColor = "#fdedec"; npvValueDisplay.style.color = "#e74c3c"; npvStatusDisplay.innerHTML = "This project may result in a financial loss."; } else { resultWrapper.style.backgroundColor = "#fef9e7"; npvValueDisplay.style.color = "#f1c40f"; npvStatusDisplay.innerHTML = "This project is expected to break even."; } }