function calculateNPV() {
// 1. Get Inputs
var initialInv = parseFloat(document.getElementById('initialInvestment').value);
var ratePercent = parseFloat(document.getElementById('requiredRate').value);
// 2. Validation
if (isNaN(initialInv)) initialInv = 0;
if (isNaN(ratePercent) || ratePercent === 0) {
alert("Please enter a valid Required Rate of Return.");
return;
}
var rateDecimal = ratePercent / 100;
var totalPV = 0;
// 3. Loop through 10 years of cash flows
for (var i = 1; i 0) {
npvElement.className = "result-value npv-positive";
document.getElementById('decisionResult').innerText = "Accept Project (Profitable)";
document.getElementById('decisionResult').style.color = "#2f9e44";
} else if (npv < 0) {
npvElement.className = "result-value npv-negative";
document.getElementById('decisionResult').innerText = "Reject Project (Unprofitable)";
document.getElementById('decisionResult').style.color = "#e03131";
} else {
npvElement.className = "result-value";
document.getElementById('decisionResult').innerText = "Break Even (Neutral)";
document.getElementById('decisionResult').style.color = "#fcc419";
}
}
Understanding Net Present Value (NPV) and Required Rate of Return
Net Present Value (NPV) is one of the most reliable metrics used in capital budgeting and investment planning to analyze the profitability of a projected investment or project. Unlike simple profit calculations, NPV accounts for the "time value of money"—the concept that a dollar earned today is worth more than a dollar earned in the future due to its potential earning capacity.
This calculator allows investors, financial analysts, and business owners to determine if a specific project will yield a return that meets or exceeds their specific required rate of return.
What is the Required Rate of Return?
The Required Rate of Return (RRR), often referred to as the discount rate or hurdle rate, is the minimum return an investor expects to receive for their investment. It compensates the investor for the risk taken and the opportunity cost of investing capital elsewhere.
Risk Adjustment: Higher-risk projects typically require a higher rate to justify the potential downside.
Opportunity Cost: If you can get a guaranteed 4% return from bonds, your required rate for a business venture might be 10% to make it worth the effort.
Cost of Capital: For corporations, this often aligns with the Weighted Average Cost of Capital (WACC).
How NPV is Calculated
The logic behind the Net Present Value formula is to discount all future cash inflows back to their value in today's dollars, then subtract the initial cost of the investment.
Where: r = Required Rate of Return t = Time period (years) Σ = The sum of values over all periods
Realistic Example
Imagine a business considering purchasing a new machine for $50,000 (Initial Investment). The company's Required Rate of Return is 10%. The machine is expected to generate the following cash flows:
Year 1: $15,000
Year 2: $15,000
Year 3: $15,000
Year 4: $15,000
Year 5: $10,000
Using the calculator above, the present value of these flows is calculated and summed up. If the total present value exceeds $50,000, the NPV is positive, and the project adds value to the firm. If it is less than $50,000, the project destroys value relative to the required rate.
Interpreting Your Results
Once you calculate the NPV, the decision rule is straightforward:
Positive NPV (> $0): The projected earnings (in today's dollars) exceed the anticipated costs. The investment should generally be Accepted.
Negative NPV (< $0): The project is expected to result in a net loss relative to the required rate of return. The investment should generally be Rejected.
Zero NPV (= $0): The project is expected to exactly meet the required rate of return. The decision may depend on other non-financial factors.