Net Present Value (NPV) Calculator
Enter the upfront cost, projected annual cash flows and your discount rate (often your WACC or required rate of return) to compute Net Present Value, Profitability Index and discounted payback period. NPV > 0 means the project beats your hurdle rate — the gold-standard capital-budgeting decision rule used worldwide.
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Net Present Value (NPV)
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Year-by-year discounting
| Year | Cash flow | Discount factor | Present value | Cumulative NPV |
|---|
Cash flows are assumed to occur at the end of each period, all discounted at the same rate.
Formula
NPV = − C₀ + Σₜ₌₁ⁿ CFₜ / (1 + r)ᵗ Discount factor DFₜ = 1 / (1 + r)ᵗ Profitability Index PI = (Σ PV inflows) / C₀ Discounted payback = year at which cumulative discounted cash flow first turns non-negative (linear-interpolated).
- · All cash flows are assumed to occur at the end of each period — the year-end convention used by textbooks, Excel's NPV(), and virtually every investment-banking model.
- · The discount rate (r) should reflect project risk: start with company WACC, then adjust ±1–5 % for project-specific risk.
- · NPV and IRR usually give the same accept/reject signal, but for mutually exclusive projects or non-conventional cash flows (multiple sign changes), trust NPV.
- · Profitability Index PI = 1 + NPV / C₀. Under capital rationing, rank projects by PI to maximise value per dollar of constrained capital.
- · Discounted payback is longer than simple payback because early cash flows are worth less once discounted. This tool linearly interpolates the fractional year.
- · A single constant discount rate is assumed. Real DCF work may use a spot-rate curve (different r per year), but this is overkill for most estimates.
- · References: Brealey, Myers & Allen, Principles of Corporate Finance, Ch. 5; Excel/Sheets NPV() and XNPV(); CFA Level I Corporate Finance reading on capital budgeting.
Frequently asked
What discount rate should I use?
For corporate projects, the most common starting point is the company's WACC — the blended cost of debt and equity, currently ~6–10 % for large US firms. For startups or early-stage investments, 15–25 % is typical. For personal decisions (e.g. buying property vs. renting), use your personal hurdle rate — say "I need at least 5 % to tie up my cash." Misestimating the discount rate is the single biggest source of NPV error, so always run a sensitivity check at ±1–2 % around your chosen rate to see how NPV moves.
NPV vs IRR — which should I use?
NPV expresses value created in absolute dollars (e.g. $50,000) — directly additive and ideal for mutually exclusive choices. IRR is the discount rate at which NPV = 0 — an intuitive percentage. For a conventional project (one outflow then inflows), they agree on accept/reject. But non-conventional flows (multiple sign changes) can have no IRR or multiple IRRs, while NPV always gives a clean answer. Academic consensus: learn IRR for intuition, but make decisions on NPV — especially when ranking multiple projects under capital constraints.
Why does NPV treat a future dollar as worth less than a dollar today?
This is the time value of money — three forces compounding into a single discount rate: (1) opportunity cost — a dollar today can earn interest immediately; (2) inflation — purchasing power erodes; (3) risk — future cash flows might not materialise. Example: at 8 %, $100 received in 5 years is worth $100 / 1.08⁵ = $68 today. The intuition isn't that future dollars are 'worse' — it's that you only need to set aside $68 today, earning 8 %, to have $100 in 5 years' time.
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