| Year | Cash Flow | PV Factor | Present Value |
|---|---|---|---|
| '+year+' | $'+cfArray[j].toLocaleString(undefined,{minimumFractionDigits:2,maximumFractionDigits:2})+' | '+pvFactor.toFixed(4)+' | $'+pv.toLocaleString(undefined,{minimumFractionDigits:2,maximumFractionDigits:2})+' |
Total PV of Inflows: $'+totalPV.toLocaleString(undefined,{minimumFractionDigits:2,maximumFractionDigits:2})+'
'+stepsHTML;document.getElementById('stepDetails').innerHTML=details;document.getElementById('stepDetails').style.display='block';}else{document.getElementById('stepDetails').style.display='none';}}How to Use the NPV Calculator
The NPV calculator is an essential tool for financial analysts and business owners to evaluate the profitability of an investment or project. By calculating the Net Present Value, you can determine if the future cash flows generated by an investment are worth more than the initial cost in today's dollars.
To use this calculator, simply follow these steps:
- Initial Investment
- Enter the total upfront cost of the project (e.g., $10,000). Do not include a negative sign; the calculator subtracts this from the present value of inflows.
- Discount Rate
- The annual interest rate or the target rate of return (hurdle rate) you expect. For example, if you require a 10% return, enter "10".
- Cash Flows per Period
- Enter the expected cash inflows for each subsequent year, separated by commas. For example: 3000, 4000, 5000 represents cash flows for Year 1, Year 2, and Year 3 respectively.
The NPV Formula
NPV is calculated by taking the sum of the present values of all cash flows over a period of time and subtracting the initial investment cost. The mathematical formula is:
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
NPV Calculation Example
Scenario: You are considering a project that costs $10,000 upfront. It is expected to return $5,000 in Year 1, $4,000 in Year 2, and $3,000 in Year 3. Your required rate of return is 10%.
Step-by-Step Solution:
- Year 1 PV: $5,000 / (1 + 0.10)^1 = $4,545.45
- Year 2 PV: $4,000 / (1 + 0.10)^2 = $3,305.79
- Year 3 PV: $3,000 / (1 + 0.10)^3 = $2,253.94
- Total PV of Inflows: $4,545.45 + $3,305.79 + $2,253.94 = $10,105.18
- NPV: $10,105.18 – $10,000 = $105.18
Since the NPV is positive ($105.18), the investment is technically profitable and meets your 10% return threshold.
Common Questions
What does a negative NPV mean?
A negative NPV indicates that the projected earnings (in present dollars) are less than the anticipated costs. This does not necessarily mean the project will lose money in total dollars, but it means the project will not meet the specified Discount Rate (target return).
What is the Profitability Index?
The Profitability Index (PI) is the ratio of payoff to investment of a proposed project. It is calculated as (Total Present Value of Inflows) / (Initial Investment). A PI greater than 1.0 indicates a positive NPV.
Why is the discount rate important?
The discount rate accounts for the "time value of money" and the risk of the project. A dollar today is worth more than a dollar tomorrow because today's dollar can be invested to earn interest. High-risk projects usually require a higher discount rate.