NPV Calculator

Net Present Value (NPV) is a financial metric that calculates the current worth of a series of future cash flows, discounted at a specified rate of return. It tells you how much value an investment creates or destroys in today's dollars. A positive NPV means the investment earns more than your required rate of return and is potentially worthwhile. A negative NPV means the investment earns less than your threshold and may not be worth pursuing. NPV is one of the most widely used tools in capital budgeting and investment analysis.

NPV is calculated by discounting each cash flow back to the present using the formula: NPV = Σ (CF_t / (1 + r)^t), where CF_t is the cash flow at time t, r is the discount rate (as a decimal), and t is the time period (0, 1, 2, ...). The initial investment (CF_0) is typically negative. For example, investing $10,000 today with expected returns of $3,000, $4,000, $4,000, and $3,000 over 4 years at a 10% discount rate yields an NPV of approximately $1,087, meaning the investment creates about $1,087 of value above your required return.

The discount rate represents your required rate of return or the cost of capital. For businesses, it's often the Weighted Average Cost of Capital (WACC), typically 8–15% for most companies. For personal investments, use your expected opportunity cost — the return you could earn on a similar-risk investment. A higher discount rate makes it harder for projects to show positive NPV. Conservative investors often use 10–12%, while more aggressive projections might use 6–8%. The key is to be consistent and realistic about what return you need to justify the investment.

A positive NPV means the investment is expected to generate more value than it costs, after accounting for the time value of money and your required return. It's a signal to proceed with the investment. A negative NPV means the investment is expected to return less than your required rate, suggesting you should reject it or look for better alternatives. An NPV of exactly zero means the investment earns exactly your required rate of return. In practice, projects with higher positive NPVs are preferred, as they create more shareholder or investor value.

NPV and IRR are complementary investment analysis tools. NPV tells you the dollar value created by an investment at a specific discount rate — a concrete dollar figure. IRR (Internal Rate of Return) tells you the rate of return at which NPV equals zero — the breakeven return rate. For example, if an investment has an NPV of $1,087 at a 10% discount rate and an IRR of 14.5%, it means the project earns a 14.5% return, and at your 10% hurdle rate, it creates $1,087 of value. NPV is generally preferred for decision-making because it measures absolute value creation, while IRR can be misleading for comparing projects of different sizes.