Net Present Value (NPV) Calculator
Use this calculator to determine the Net Present Value (NPV) of an investment. Enter the initial investment, discount rate, and the series of future cash flows to see the project's value in today's dollars.
Your Project's NPV
Enter project details to calculate its value.
Understanding Net Present Value (NPV)
Net Present Value (NPV) is a cornerstone of corporate finance and capital budgeting. It calculates the difference between the present value of future cash inflows and the present value of cash outflows over a period of time. In short, it tells you what an investment is worth in today's dollars.
The Importance of the Discount Rate
The entire concept of NPV is built on the time value of money, which states that a dollar today is worth more than a dollar tomorrow. The discount rate is the engine that drives this calculation. It represents a required rate of return or the cost of capital. Common choices for the discount rate include:
- The company's Weighted Average Cost of Capital (WACC).
- A specific "hurdle rate" that any new project must overcome.
- The interest rate of a loan financing the project.
- The opportunity cost of investing in another project instead.
How to Interpret the NPV Result
The output of the NPV calculation is a dollar amount, which is interpreted as follows:
- Positive NPV ($ > 0): The investment is projected to be profitable. It is expected to earn more than the discount rate, thereby creating value. The project should be accepted.
- Negative NPV ($ < 0): The investment is projected to be unprofitable. It is expected to earn less than the discount rate, thereby destroying value. The project should be rejected.
- Zero NPV ($ = 0): The investment is projected to earn exactly the discount rate. The decision to proceed could depend on non-financial factors, as the project creates no additional monetary value.
NPV vs. IRR (Internal Rate of Return)
While NPV provides an absolute dollar value of a project's worth, the Internal Rate of Return (IRR) provides a percentage return. They are closely related: the IRR is the discount rate at which the NPV of a project is exactly zero. While IRR is often more intuitive, financial professionals generally prefer NPV because it provides a direct measure of how much value a project adds to a company. For mutually exclusive projects, NPV is the superior metric for decision-making.